Wed, Apr 03, 2002 page19

• The new quarter in the US picking up where the old one left off

  • By Caroline Baum / BLOOMBERG
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  It's a new month, a new quarter, yet the same old story: the economy is coming back gangbusters.

  The first piece of economic information for the second quarter, reflecting activity that took place in March, was stronger than expected, a familiar refrain these days. The Institute for Supply Management's purchasing managers' index added to February's 5-point gain, rising another 0.9 point in March to 55.6. The March reading is the highest in more than two years and represents a 41 percent increase from the October 2001 low of 39.5, which in retrospect represented overly pessimistic assumptions on the part of business about sales following the Sept. 11 terrorist attacks.

  The most impressive aspect of the report was the breadth of industries reporting increased activity and the strength in new orders, the basis for future production. Fifteen of the 20 industries surveyed, including the three that correspond to technology industries, reported a rise in activity last month.

  The new orders index, which took a great leap forward in February (up 7.5 points to 62.8), added to those gains, rising to a 15-year high of 65.3. Only three of the 20 industries in the ISM survey failed to see orders increase last month. This is no narrow recovery manufacturing is experiencing.

  Within new orders, new export orders, virtually unchanged in March at 51, expanded for the third consecutive month.

  Another positive surprise, assuming one considers higher prices a validation of increased demand, was the first reading above 50 in the index of prices paid. The 10.4-point jump to 51.9 hoists the index to its highest level since February 2001.

  Meanwhile, supplier deliveries slowed for the third consecutive month (slower deliveries equate with a stronger economy). The index hit a 19-month high of 53.1.

  While manufacturers are still shedding workers, the pace of decline in employment was the slowest in 1 1/2 years, according to the 47.5 registered by the ISM employment index. In fact, the ISM has found that an employment index above 47.6 over time is consistent with an increase in the US Labor Department's gauge of manufacturing payrolls.

  "Some manufacturers are already talking about hiring blue-collar workers," says Norbert Ore, chair of the ISM's Manufacturing Business Survey committee and group director, strategic sourcing and procurement, at Georgia-Pacific Corp. "If you had asked me last month about when employment picks up relative to when manufacturing turns, I would have said three to nine months, probably leaning toward nine. With the employment index above 47, by May or June the decline [in manufacturing employment] should stop."

  The average reading for the ISM index for the first quarter of 53.4 corresponds to 3.9 percent growth in real domestic product, according to Ore. The March level, if it turned out to be the average for the year, would suggest real GDP growth of 4.7 percent.

  The implied ISM first-quarter forecast is not far afield from the median forecast of 50 economists surveyed by Bloomberg News in the second half of March (one wonders if it should truly be called a "forecast" given the ex-post nature of the timing). If the median GDP forecast of 4.2 percent is not much different from the growth implied by the actual reading on the ISM index, why bother with the forecasters? Jim Bianco, president of Bianco Research in Barrington, Illinois, combed his database and found that the first quarter of 2002 "should go down as the worst forecasted quarter in economic history" going back to 1984.

  At the end of the fourth quarter, the median forecast was for a decline of 0.1 percent in first-quarter growth. The Commerce Department's first guess at first-quarter GDP growth won't be reported until April 26, but it would take some really weird numbers on trade and inventories to produce a decline.

  Some forecasters lifted their first-quarter forecasts to 5 percent, following stronger-than-expected (see, there it is!) data on consumer spending, construction spending and manufacturing. Looking back at other big forecast errors -- the fourth quarter of 1987, following the October stock market crash; the post-Gulf War period; and the fourth quarter of 1998, following the Russian default and near-collapse of hedge fund Long-Term Capital Management -- Bianco diagnosed the problem as shock effect.

  "Economic forecasters cannot handle shocks and surprises to the economy," Bianco says. "They consistently overestimate the negative impact they have."

  Everyone would agree that Sept. 11 was the mother of all shocks. No wonder it produced the mother of all forecast errors.
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