Weak manufacturing orders tend to precede U.S. recessions

August 2, 2012

U.S. manufacturing activity shrank for a second straight month in July as recent economic weakness spilled into the third quarter, according to the Institute for Supply Management’s closely watched index. But that wasn’t the worst of it: new orders, a gauge of future business activity, also shrank for a second month, albeit at a slightly slower pace.

Tom Porcelli at RBC explains why the status quo may not be good enough to keep the economy expanding:

The historical record back to 1955 suggests a rather ominous outcome when ISM new orders remain at 48 or less for two straight months. In fully 75% of those instances we were hurtling toward recession. The recent headfakes occurred in 1995 during the mid-cycle slowdown and in 2003 shortly after the recession ended and when the housing boom was in its infancy. Our call remains that we’ll (barely) skirt a recession but with evidence mounting that the economic headwinds are placing significant downward pressure on economic output, we find it striking that forecasters – as bearish as we’ve been told they are – still expect growth to average 2.2% in the second half of the year.

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