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Rising From the Ashes: A Bank Economist Calls A Recovery "Imminent"

After sifting through the details of U.S. factory production, deliveries and backlogs reported for April, Asha Bangalore sees an economic recovery coming -- in fact, she says it's "imminent," perhaps as soon as the end of this year. Bangalore is so confident she used the I-word in the headline of her May 1 research note (from the perspicacious economics team at Northern Trust in Chicago). These data points have been reliable leading indicators in past cycles, and while she acknowledges that they still are at low levels, what's important is they've bounced off the bottom, and may be headed back in the expansionary direction.

Bangalore's inspiration comes from a manufacturing survey of the Institute for Supply Management. Their composite index bottomed at 32.9 in December 2008, and has recovered to 40.1 in April. She points out that a value below 50 means manufacturing is still on the decline, but the rate of contraction is slowing. This graph shows the bounce:

The composite index is built from nine measures, covering new orders, employment, prices, backlogs, etc., and every one of them rose in April. Here's Bangalore's interpretation:

In the current cycle, the Supplier Deliveries Index appears to have established a trough in March 2009, while the tentative trough for the New Orders index appears to have occurred in December 2008. If history is a guide, the details... indicate that the horse race between these indexes is very close. The important conclusion we can draw from the historical comparison is that the trough of the current business cycle is most likely not too far way.
But when Chrysler has just gone bankrupt and will close a few plants, and the effects are yet to be felt from GM closing a bunch of factories, I find it tough to imagine an increase in generally manufacturing activity. (Car sales were down over 30 percent in April, to a very slow annual pace of nine million vehicles, which Bangalore noted at the end of her note.) So I asked Bangalore to reconcile it for me.

"Yes, it's possible that the ISM numbers could turn down again," from the closing of the auto plants, she said. "The auto news will be a special factor that will be reported separately, and we'll have to discount for it somehow. But I still think it's a positive report for U.S. manufacturing."

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