Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

LaVorgna: Contraction for ISM...But No Double-Dip. Huh?


One of the primary economic gauges is about to indicate contraction, but that doesn’t necessarily indicate a double-dip is on the horizon, says Deutsche Bank economist Joe LaVorgna.

The normally big-time bull LaVorgna offered an unusually bearish assessment of the state of manufacturing — but tinged it with a bullish flavor.

Welcome to the world of economic doublespeak.

In the latest iteration, LaVorgna predicts that the Institute for Supply Management’s headline number is likely to drop below 50 in “the next couple of months.” That number is the dividing line between expansion and contraction, and last month’s better-than-expected ISM reading helped set the stage for September’s otherwise-bizarre stocks rally.

September is supposed to stink for stocks, and had every fundamental reason in the world to live up to its rancid reputation. With the comparatively strong ISM, Wall Street started to buy into the notion that a recovery was forming.

The August ISM reading of 56.3 was the first positive print of the headline number in three months.

But LaVorgna says a stock market lag in mid-summer could serve as a leading indicator that the ISM number will fall below 50 soon.

Not to worry, though. He says it’s not unusual for the ISM to regress to contraction during a recovery, and will work its way back to expansion soon enough.

When the stock market slows, managers will cut their orders and thus trigger a drop in the overall manufacturing reading, he says. September’s stock gains, then, would reverse that trend.

Moreover, previous recessions, including 1990-91 and 2001 also saw the ISM number briefly drop below 50 before recovering.

“Consequently, a sub-50 reading is not necessarily a sign to hit the panic button,” LaVorgna tells clients. “Remember that sub-50 means that the factory sector is declining, not the broader economy. For the ISM to foreshadow negative GDP growth, the index has to be down around a 43 reading, in our view.”

Note that LaVorgna is not the first economist to predict ISM will fall below 50 again, but his take that it won’t portend a double-dip is somewhat unique.

Back on Sept. 2, Gluskin Sheff’s David Rosenberg called the August ISM “likely a huge head fake” and noted that the regional reports were far weaker than the national reading.

That hardly seems to disturb LaVorgna, who predicts above-consensus 3.25 percent GDP growth in 2011 despite upcoming weak ISM numbers.

Consider this: ISM says the August print would translate into 4.8 percent annualized GDP, even higher than LaVorgna’s full-year 2011 outlook But the August 2009 reading was 52.8, yet produced a paltry 1.7 percent GDP a year later, according to Thursday’s data.

So if the ISM is going to hit 48 in the next two months, as LaVorgna suggests, how do we not double-dip?

Questions? Comments? Email us at

Follow Jeff @

Follow NetNet on Twitter @

Facebook us @