Thursday, October 30, 2008

Today's GDP Release Leaves ISM With Egg On Its Face

If you've been a long-time reader of this blog, you know that I am critical of ISM's claims that its PMI is a good economic indicator. Well, today, we've got some pretty conclusive proof that I'm not wrong about it.

Today, the United States Commerce Department reported that the economy contracted in the July - September 2008 quarter with GDP shrinking at a 0.3% annual rate.

So what did ISM say happened to the economy during this same time period?

They said it grew.

Here's what they said in their last three "Reports On Business" covering the same quarter:

  • In the July report, ISM said that "the overall economy grew for the 81st consecutive month"; "the PMI indicates the overall economy is growing and the manufacturing sector is unchanged from June"; and "if the PMI for July is annualized, it corresponds to a 2.8 percent increase in real GDP annually."
  • In the August report, ISM said that "the overall economy grew for the 82nd consecutive month"; "the PMI indicates the overall economy is growing"; and "if the PMI for August is annualized, it corresponds to a 2.8 percent increase in real GDP annually."
  • In the September report, ISM said that "the overall economy grew for the 83rd consecutive month"; "the PMI indicates the overall economy is growing "; and "if the PMI for September is annualized, it corresponds to a 0.8 percent increase in real GDP annually."

While others in the sector have given an argument such as "well, at least ISM's index is directionally accurate," here's a perfect example of how it's not even directionally accurate.

Sure, when you have seven years of growth and an index indicates growth - even disproportionate growth - it's easy to believe in the index. But it is times like these when we have swings between expansion and contraction that the true colors of an index are revealed.

If you're interested in more details about why ISM's PMI is so flawed, here are links to some of my earlier posts and an interview:

Caveat Emptor: Economic Indices Could Be Misleading You (November 30, 2006)

ISM's PMI is BS (February 6, 2008)

The ISM Index Gets More Amusing By The Second (March 4, 2008)

Another ISM Index Contradiction (March 5, 2008)

I dislike being negative due to there being enough of that in the election, but the release of the GDP report demanded the right timing.

More positive stuff coming soon, I promise!

UPDATE 11/25/2008: The US Commerce Department today released an update to the 3rd quarter GDP numbers, now saying that the economy shrunk 0.5% instead of 0.3%. This widens the gap between reality and the ISM numbers.

To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM® Certification Online At
http://www.NextLevelPurchasing.com

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