October 1, 2010

Stocks Rose as ISM Manufacturing Reported Up, Consumer Sentiment Steady

Construction and personal spending and income also higher

The manufacturing sector showed signs of expansion on Friday and U.S. consumer sentiment held steady, but those positive signs of recovery were not enough to convince analysts that the economy is on solid footing.

Economic activity in the manufacturing sector expanded in September for the 14th consecutive month, and the overall economy grew for the 17th consecutive month, but new orders slowed, the nation's supply executives reported in Friday’s purchasing managers index (PMI) from the Institute for Supply Management (ISM). The headline number showed relative strength with a PMI reading of 54.4%, down 1.9% from August’s 56.3%. Economists’ consensus was for a headline reading of 54.5.

Meanwhile, the Thomson Reuters/University of Michigan final index of consumer sentiment for September came in at 68.2, higher than the preliminary estimate of 66.6 but down from 68.9 in August. Analysts had anticipated a lower reading of 67.

Stocks closed higher Friday. The Dow Jones industrial average rose 41.63 points, or 0.4%, to close at 10,829.68. The Standard & Poor's 500 index rose 5.04 points, or 0.4%, to 1,146.24, and the Nasdaq composite rose 2.13 points, or 0.1%, to 2,370.75.

Despite the positive PMI data, the overall picture was “less encouraging,” said Norbert Ore, chairman of the ISM’s Manufacturing Business Survey Committee, in a statement.

“The growth of new orders continued to slow, as the index is down significantly from its cyclical high of 65.9% in January 2010,” Ore said. “Production is currently growing at a faster rate than new orders, but it typically lags and would be expected to weaken further in the fourth quarter. Manufacturing has enjoyed a stronger recovery than other sectors of the economy, but it appears that weaker growth is the expectation for the fourth quarter."

The positive consumer news came in contrast to the Conference Board’s consumer index for September, which reported on Monday a precipitous drop to 48.5 in September—its lowest level since February—compared to a revised 53.2 in August from an original reading of 53.5. The headline number was well below economists’ expectations for a reading of 52.5. Forecasts ranged from 48.0 to 55.0, according to a Thomson-Reuters poll.

Why such a dramatic difference between Monday and Friday?

“These consumer indexes are survey based, done by private organizations,” said Doug Roberts, chief investment strategist for ChannelCapitalResearch.com, Shrewsbury, New Jersey. “Similarly, for example, in a local New York election poll, Andrew Cuomo may be just barely eking by with 4 points, and in another one he’s supposedly up 15 or 16 points. It all depends on how you ask the question, how you weight the data, and who you ask.”

As for the ISM data, Roberts said it was on target with a slight differential.

“It was not good, but then again it was priced into market,” he said. “The big change was in construction spending, where analysts expected a continued decrease, albeit a smaller one, and that was higher. “

The U.S. Commerce Department announced Friday that construction spending during August was estimated at a seasonally adjusted annual rate of $811.8 billion, 0.4% above the revised July estimate of $808.6 billion. The August figure is 10.0% below the August 2009 estimate of $901.8 billion.

Also on Friday, the Commerce Department reported more positive news in its personal income and spending report for August, which showed that income rose 0.5%, or $59.3 billion, while personal consumption expenditures increased 0.4%, or $41.3 billion. In July, income increased 0.2% and spending increased 0.4%, based on revised estimates. The spending report beat analysts’ expectations for a 0.3% increase.

Read about the August ISM report from the archives of AdvisorOne.com.

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