Caution in Order on Manufacturing Index

By MARK GONGLOFF A slew of new data will offer fodder for the market's brewing debate about just how hot the economy is running. The Institute for Supply Management on Monday releases its May manufacturing index, heralding a busy week for economic numbers that ends with Friday's May employment report. Monday also brings April personal income and spending. Later this week come auto sales, factory orders and the ISM's service-sector gauge. Ben Bernanke makes a couple of appearances, too. Though the factory sector holds an ever-shrinking share of the economy, it is still sensitive to the twists and turns of the business cycle, so the market watches the ISM closely. The ISM has also been this year's greenest shoot, trumping forecasts and reinforcing hopes of the recession's end. Economists estimate it rose to 41.5 from 40.1 in April. That figure would cross the 41.2 threshold the ISM says is associated with a shrinking economy. Indeed, any ISM reading higher than 41.2 could lead to declarations the recession is over. This news could justify the rapid rise in stocks in the past three months, particularly when some key indicators, including consumer spending and housing data, have soured again. But it might also feed the fear that the Federal Reserve will twiddle its thumbs while interest rates rise, on the idea that the Fed doesn't mind rising rates if they reflect economic strength. Yet, concluding anything firm in either direction might be premature. For one thing, ISM averages 43.1, not 41.2, during recessions. And it inconsistently predicts recoveries, bottoming 2.5 months before the past two recessions ended, but seven months before the 1981-82 recession ended. Meanwhile, the Chicago Purchasing Managers' Index, which usually mirrors the ISM, tumbled unexpectedly in May to 34.9 from 40.1. It was likely hurt by automobile-plant shutdowns, which won't affect the ISM quite as much but could slow its recovery. "Until the auto industry sees growth, at least 17% of the [factory] production lost will remain unrecovered," Barclays Capital economist Nicholas Tenev told clients recently. A sputtering ISM recovery could start to shift market talk away from green shoots to double dips. Email to tape@wsj.com