The Week Ahead: Why ‘isms’ are test for investors and the Federal Reserve

Investing is full of “isms.” Capitalism, optimism and pessimism are the three most common.

ISM — in all caps — is not a specific philosophy or system, though. It stands for the Institute of Supply Management. Every month purchasing managers fill out a survey about their companies’ business activity. The group’s survey of industries such as retail, construction and restaurants capture a huge slice of the American economy.

In other words, the ISM Services report is about consumerism. And it has been slowly dropping since the summer. The November data is due Monday.

There is plenty of skepticism that the economy can withstand the sharply higher interest rates brought on by the Federal Reserve’s efforts to stamp out high inflation. Still, there has been a dearth of evidence indicating a shrinking economy. Slowing, yes. Shrinking, no, not yet at least.

The recession dogmatism has history on its side. The sharp and fast pace of monetary tightening by the central bank is unprecedented in the last generation. The Fed’s pandemic response of flooding the economy with cheap money came to an end in the summer. The central bankers are widely expected to slow their pace when they discuss their target short-term interest rate again in mid-December. On Wednesday, Fed Chairman Jerome Powell spoke with clarity. “The time for moderating the pace of rate increases may come as soon as the December meeting,” he said.

But don’t think the Fed’s inflation activism is over. A less rapid rise of interest rates does not mean reversing course. The chairman concluded his speech by saying that bringing inflation under control “will require holding policy at a restrictive level for some time,” using a euphemism for higher borrowing rates.

The ISM Services report for November is likely to support that outlook. Purchasing Activity may be slowing but price increases aren’t. That dualism is at the center of the challenge faced by the Fed and investors.

Tom Hudson is a financial journalist and chief content officer at WAMU public radio in Washington, D.C. Follow him on Twitter @HudsonsView.