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Some New Year's Cheer for U.S. Manufacturing

The recovery in U.S. manufacturing appears to be stronger than most observers had expected, at least according to a report released Jan. 2. The Institute for Supply Management (ISM) survey for December came in far stronger than analyst forecasts, with the headline index at 66.2 vs a prior 62.8 -- its highest level since December, 1983, while the orders index hit its highest level since July, 1950. The expectations component of the report posted a 61.5 reading.

Luckily, the prices index, though elevated at 66.0 vs a prior 64.0, did not reach a similar long-term high (March 2003 was higher). ISM takes this as "significant encouragement" for Q1. We would say so. ISM data tend to do a good job of indicating whether growth is above or below trend, and the extent of that difference. This points to growth well above trend.

The orders index reached 77.6, vs. 73.7, with production at 73.0, vs. 64.0. The employment index is at 55.5 (thunderous compared to anything in recent memory), vs. 51.0. There will be some rethinking of factory employment estimates in response. The Fed probably won't change its rhetoric right away, but will certainly take the news as encouraging.

Treasury market players, however, took a predicatbly bearish view on Jan. 2 after the much stronger than expected ISM data. Treasuries across the yield curve added to earlier losses, with the yield on the 10-year note rising 6 basis points to 4.35% almost immediately. From MMS International staff analysts

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