ISM Data for the First Quarter Point to Sluggish U.S. Economic Growth in Q1

At the start of each month, the U.S. Institute for Supply Management (ISM) releases data on the state of the manufacturing and non-manufacturing industries of the U.S. economy. The data are closely followed by economists, stock market brokers and the media as they provide the earliest reading on the current state of the economy. The ISM provides data on the current performance of a number of indicators related to the manufacturing and non-manufacturing industries such as production, employment, new orders and backlog of orders, deliveries, inventories, new exports, imports and prices. Figure 1 plots the evolution since the first quarter of 1998 of U.S. real GDP growth and a proprietary coincident economic index from The Forecasting Advisor, built from a number of indicators from both the survey on manufacturing and non-manufacturing industries.

The aggregation of indicators from both surveys into a coincident economic index provides a close relationship with historical movements in real GDP growth. In other words, the Figure suggests that the coincident index contains useful information on the actual strength of economy. Since the ISM data are never revised, except for the annual updates of the seasonal adjustment factors, the coincident economic index is a very useful real time forecasting tool and provides valuable, timely and leading information on the near-term outlook for U.S. economic growth. 

U.S. Real GDP Growth Outlook

The value of the coincident economic index for the first quarter is used to get a forecast of the rate of growth in U.S real GDP for the first quarter of 2015. The official advance estimate of real GDP growth for the first quarter of the 2015 will be released by the U.S. Bureau of Economic Analysis (BEA) on April 29th.

The forecast for the first quarter of 2015 is reported in Figure 2. The U.S. economy is expected to post a second consecutive modest gain in the first quarter. Indeed, real GDP is currently projected to rise by 1.9% (annual rate), still less than the 2.2% gain recorded in the fourth quarter of 2014.

On May 5th, The Forecasting Advisor will provide a forecast for the second quarter of 2015 based on the value of the coincident economic index for the month of April. (Note that the first estimate from the BEA for real GDP will be released on July 30th.) The forecast will provide leading insightful intelligence on the strength of the U.S. economy early in the second quarter. We will then be able to determine if the sluggish growth in the first quarter will likely continue or not in the second quarter and assess the implications for corporate profits, the stock market and the start of a cycle of monetary policy tightening in June or later.

© Robert Lamy, The Forecasting Advisor.

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