Bias & The Abuse Of Economic Data

By Joseph Calhoun

Zero Hedge ran a guest post from Phoenix Capital Research yesterday below the headline, It's Official, The US Is Back In Recession. The post highlights the sub 50 reading on the latest ISM Manufacturing survey:

As warned previously on these pages, the US is in a recession... again.

The latest ISM reading came in at 49. Any reading below 50 is considered recessionary. And an ISM of 49 is the worst in four years.

The only problem is that a sub 50 reading on the ISM Manufacturing survey isn't considered recessionary. From the ISM website:

A PMITM in excess of 42.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the May PMITM indicates growth for the 48th consecutive month in the overall economy, and indicates contraction in the manufacturing sector for the first time since November 2012. Holcomb stated, "The past relationship between the PMITM and the overall economy indicates that the average PMITM for January through May (51.7 percent) corresponds to a 3 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMITM for May (49 percent) is annualized, it corresponds to a 2.1 percent increase in real GDP annually."

We may or may not be in recession right now but Phoenix Capital Research doesn't know that and neither do I. It certainly can't be determined by looking at the ISM by itself. 


As you can see, there have been numerous times the ISM has printed below 50 and a recession wasn't the outcome. All it means is that manufacturing is contracting. In our services dominated economy contracting manufacturing does not mean recession. We can argue about why manufacturing has fallen as a % of GDP and whether our economy would be better off it were a bigger part like it once was, but that doesn't make it so. And by the way, I'm in the camp that says a return to a manufacturing dominated economy makes about as much sense as returning to the agrarian dominated one that preceded it.

Phoenix is probably a fine firm but they are a victim of their own biases. They are obviously bearish and tend to view the data through that lens. It might get hits on their website or Zero Hedge's but it isn't analysis.

Joseph Calhoun is CEO of Alhambra Investment Partners in Miami, Florida. He can be reached at

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