The Fed Chair’s comments were essentially a rehashing of familiar talking points. He’ll “act accordingly” in the face of rampant uncertainty to sustain the expansion.
For the week, the S&P rose 1.8%, no small feat considering how rocky things were on Tuesday when, fresh off the three-day weekend in the US, Donald Trump unleashed a series of abrasive tweets aimed at Beijing, among other foes.
It’s also notable that stocks held up despite the first contractionary ISM manufacturing print in three years, which came hot on the heels of the worst consumer sentiment reading of the Trump presidency.
When taken in conjunction with the August payrolls miss and the accompanying revisions, the picture isn’t all that bright for the White House.
But a contraction-territory ISM isn’t necessarily a death knell. In fact, Goldman suggests it might be a blessing in disguise.
“In six of 11 instances since 1975 a recession did not occur despite the fact the ISM fell below 50”, the bank wrote Friday evening, adding that “during these six episodes, the ISM index typically declined for six months from 50 to its trough [and] did not decline below 45.5 in any of the six episodes whereas in recessions the ISM usually fell below 40”.
The silver lining, for those predisposed to glass-half-full takes, is that “during previous episodes when the US economy did not enter a recession despite ISM readings below 50, the S&P 500 typically rose in the subsequent six months [by] +6% and 12 months [by] +22%”, Goldman notes.
In essence, this is just another play on the thesis that says manufacturing recessions aren’t as concerning for the US economy as they used to be.
The bank’s David Kostin underscores that.
“The ISM was a much better predictor of US recessions during the 1970s and 1980s (75% hit rate) because manufacturing accounted for 20% of nominal GDP and 60% of GDP growth volatility”, he remarks. Over the past couple of decades, though, the recession hit rate from sub-50 ISM manufacturing prints is just 30%, which Goldman suggests is attributable to manufacturing now accounting for just 10% of nominal GDP.
The bottom line is that, as Kostin puts it, “a modestly contracting manufacturing economy may not drive an overall recession”, and therefore may not lead to outsized losses in equities.