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Leading Indicators
by David Stanowski
07 February 2008

This is a graph of the Institute of Supply Management’s Non-Manufacturing Index, which measures the potential for growth in the U.S. service sector. The big January plunge was announced Tuesday ahead of the Dow’s 370-point (2.9%) decline. A reading of less than 50 represents a decline in service sector business activity. So, the one month decline from 54.4 to 41.9 carried the index, which tracks businesses that account for about two-thirds of the U.S. economy, from solidly expanding to broadly contracting. The speed and depth of the move is a critically important aspect of the reversal. From a level representing relative health, the index turned in the biggest drop in its 11-year history.

Also notice that the last recession was accompanied by an initial break below the 50 level. There have been two other breaks below 50, one was in the middle of the last recession and the other was at the end of the last bear market. Since we’re not in the middle of a recession or the end of a bear market, the break will probably stand as the first definitive signal that the economy is in recession.

from The Elliott Wave Financial Forecast Short-Term Update

ISM Service Index

Once again, Wall Street’s economists have finally—thanks to an economics statistic painstakingly compiled and reported by an upright and earnest institution (in this case the Institute for Supply Management, or IMS)—learned something the rest of America pretty much already knew.

This time, it was the following startling fact: the U.S. economy is quite weak.

At least that’s what yesterday’s ISM number—a measure of non-manufacturing business activity—revealed to shocked number crunchers on Wall Street, hitting its lowest level since 2003.

And while the number dropped jaws on Wall Street, I doubt it surprised too many people on the main street where I live.

For on that main street is a small family restaurant —highly successful over many years and many business cycles. And in that restaurant is a busboy named Sergio—one of the hardest working guys I know. And just last week Serge was gesturing at a room full of empty tables and telling me he was worried about his job.

“If it stays like this…” he said, “I don’t know what I’m going to do.” Serge is not a complainer. In fact, I’ve never heard him talk about anything but his family, his grandson, and the New York Yankees.

I asked him if it wasn’t just a slow Tuesday night, and he shook his head: “It’s been like this every night.” And the owners are taking measures, cutting hours, cutting staff.

So, precisely why the ISM number was as startling as it appeared to be to so many professionals is not entirely clear.

After all, if they're not eating at family restaurants and noticing empty tables, a few recent earnings reports would have filled them in.

Just last week Starbuck’s reported a 3% decline in customer traffic. A couple days before that, McDonald’s reported no increase in comparable-
store U.S. sales.

And if those data points from two of the largest bellwethers of the American service economy hadn’t registered with the Wall Street economist types, you might have thought the previous week’s commentary from the parent company of the ubiquitous Chili’s restaurant chain would have done the trick:

“Add to this [increasing competition] the uncertainty about the economy, a decline in consumer confidence and increased commodity costs, and we are operating in one of the toughest environments in our company history.”

That history, for the record, goes back almost 33 years.

But if Wall Streeters can be shocked by something so easily visible in their own backyards, imagine the chaos sweeping the Fed!

Maybe they should talk to Serge. I've got his cell phone number if Ben wants to call...

from Jeff Matthews Is Not Making This Up

"This is an absolute collapse of this index," said Nigel Gault, chief U.S. economist at Global Insight.

ISM said only three service industries reported growth, while 14 showed contraction. The three growing segments — utilities, professional services and educational services — include more crucial needs such as doctor visits. Meanwhile, cutbacks in less-essential spending has dragged down such segments as arts and entertainment, fishing and hunting, and lodging and food services.

Two measures that fell were those for new orders and employment, which Nieves said were more forward-looking — so their drops could indicate trouble ahead. New orders fell to 43.5 while employment fell to 43.9.

From Mish's Global Economic Trend Analysis

For the fiscal year, Wal-Mart's U.S. same-store sales rose 1.4%, the lowest figure since the company began releasing such data nearly 30 years ago.

The Baltic Dry Index is down almost 50% from its November 13 high. The BDI is a measure of shipping rates that is comprised of the average of the Baltic, Supramax, Panamax and Capesize indices. As Wikipedia notes, “the cost of shipping varies with the amount of cargo shipped (supply and demand), and since dry bulk is usually goods that are precursors to production (cement, coal and iron ore), the index is seen as a good economic indicator of future economic growth,” or, in this case, shrinkage. Here too, the speed and size of the decline suggests an inordinately large market response. Normally, the fundamentals are not relevant to the stock market’s short-term prospects, but Tuesday’s sell-off demonstrates why that’s not the case this time. The unfolding Cycle wave [c] is a recognition wave so it will happen amidst evidence of a crumbling economic outlook. So don’t be fooled by the investors’ willingness to take the bad news in stride. Things appear to be getting worse because they really are getting worse, and the stock market will reflect the change with a price deterioration that is every bit as nasty.

Yesterday CNBC financial wild man Jim Cramer said he wants to own foreign stocks because “I am confident everybody else is no where near as bad as we are.” This is a knee-jerk response to the initial effects of the downturn, which are worse in the U.S. because the U.S. is the financial center of the world and the decline started in this sector, just as EWFF suggested it would back in January 2007. But our larger point is that a massive worldwide aversion to risk is behind the financial plunge, and the forecast for 2008 is that it will now advance on the global economy. The first blows are to its heart, the U.S. consumer, but the new conservatism will ultimately push into all parts of the world. As the wheels of industry start to slow, the impact should be felt even more keenly in distant markets where the risks are higher and leverage is piled at least as high it is in the U.S.

from The Elliott Wave Financial Forecast Short-Term Update

Baltic Dry Index

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