ISM Manufacturing Index: Deep recession territory

The Institute for Supply Management (ISM) released its monthly report on Manufacturing, the ISM Manufacturing Report on Business®.  It showed a reading of 36.2 down from 38.9.  Where 50 is the demarcation line between growth and recession, 36.2 says the manufacturing industry in the United States is deep into recession territory.

As with recent employment data, there is nothing positive to say about this report.  Everything is contracting from new orders to employment to prices  — and it is all doing so at a faster rate, suggesting worst is yet to come.

This is what respondents to the ISM survey had to say about business:

• “The only positive thing of late is that the U.S. dollar has strengthened significantly against other currencies. We import the majority of our materials so this will have the effect of lowering our COGS.” (Transportation Equipment)
• “Steel industry is our main customer, and they have had a real slowdown.” (Computer & Electronic Products)
• “Criteria for projects is significantly higher with very short ROI periods.” (Food, Beverage & Tobacco Products)
• “We have revised downward our top-line sales estimates for CY2009 by 8 percent due to the continued softness we see in the housing sector.” (Machinery)
• “Suppliers are trying to hold onto pricing, but petrochemical and commodity prices are dropping like a rock.” (Plastics & Rubber Products)

36.2 is the lowest reading on the ISM Manufacturing Index since May 1982’s 35.5. So, for manufacturing, this is the deepest recession in nearly three decades.

What has me worried is the potential bankruptcy of a Big Three automaker which would mean a massive loss of jobs in the U.S. and Canada. Moreover, the weakness is widespread. This is not a U.S.-centric phenomenon. Look at what Japan Economy Watch says about Japan for instance:

Japanese industrial output was down again sharply in October as manufacturers forcecast further record falls in the months to come, leading to warnings that Japan’s recession may well be much deeper and even longer than originally anticipated. This rather bleak news on Japanese factory output may also be a pointer to a longer and deeper global recession, as Japan’s main customers – the euro zone and U.S. – enter recession while growth slows sharply in China.

Industrial output fell 3.1 percent in October, significantly above the median market forecast for a 2.5 percent drop, and the outlook now is for a record 8.6 percent contraction in the fourth quarter. Industrial output has already fallen in all three quarters so far this year and, with exports and household spending now also in decline, it looks very much like the present recession can be a long and deep one, possibly the longest since Japan’s two decade low-growth/price-deflation agony started in the early 1990s.

Combine this data with what we already know and it should be readily apparent that the U.S. and global economy will be suffering for some time to come. My advice to U.S. policy-makers is that they deal with the Big Three automaker situation quickly and deftly or we could see much worse.  Another botched bankruptcy a-la Lehman Brothers is the last thing we need.

Source
November 2008 Manufacturing ISM Report On Business® – ISM
Japan Deflation Risk Grows As Industrial Output Falls Sharply – Japan Economy Watch