KEY DATA: ISM (Manufacturing): +2.4points; New Orders: +5.8 points; Employment: +0.9 point; backlogs: +6 points

IN A NUTSHELL:  “The manufacturing sector is ramping up and it looks like strong October vehicle sales will keep things going.”

WHAT IT MEANS:  After two consecutive quarters of strong economic activity, questions remain about the sustainability of growth.  If the October consumer-oriented data that we have received so far are any indication, we could be in for another solid quarter.  Last week we saw a jump in confidence, a necessary but not sufficient condition for strong growth.  The jump in the Institute for Supply Management’s manufacturing index in October adds to the belief that the economy is in really good shape.  Activity surged back up to its August level, which was the highest in 3½ years.  New orders skyrocketed and with backlogs growing solidly, it looks like increases in production will continue.  Hiring accelerated as well as firms are adding workers to meet the growing demand.  Looking forward, early, but incomplete, sales numbers point to continued solid vehicle sales in October and that should help keep the momentum in the manufacturing sector going. 

In a separate report, construction activity eased in September, which was somewhat of a surprise.  With state and local governments spending again, one of the places that they are using their newfound revenues is in infrastructure rebuilding.  That did not show up in this report and public activity fell.  Private sector construction was down slightly even as residential spending rose.

MARKETS AND FED POLICY IMPLICATIONS: We seem to be in one of those Missouri moments, where despite six months of strong growth, everyone seems to still be saying, “show me” more.  Clearly, the Fed members are still somewhat agnostic about the current state of economic affairs.  But with Europe and Japan hurting and who knows what is going on in China, you don’t have a strong manufacturing sector unless the U.S. economy is humming along.  Investors should love the manufacturing and vehicle numbers, but on a day before an election, caution remains the better part of valor.  The markets are on hold and if some of the elections go as they could, we may be waiting weeks before we know who controls the Senate.  That would require people to turn their focus to the economic fundamentals, which right now look pretty good.