ISM shows manufacturing sector close to recovery
Today the July 2009 Manufacturing ISM Report On Business was released and the widely followed PMI Index came in ahead of expectations at 48.9. Any number below 50 represents contraction, so this figure shows that the manufacturing sector in the US contracted for an 18th consecutive month. Nevertheless, the improvement since the beginning of the year is marked and given the trend, the sector will likely be above 50 next month or soon thereafter.
Last month I mentioned that new orders were no longer increasing as the reading had slipped below 50. That was very worrying to me and it makes new orders a number to watch going forward. There was a brisk uptick in new orders in July that, if sustained, will mean that increased production is not just a result of restocking of inventory but of actual order flow for product.
Now, if you read Calculated Risk’s take on this report, you would get the impression that things are still looking pretty bad in the manufacturing sector. I have immense respect for the work done at CR , but that type of post reflects a clear bearish bias. I have a bearish bias toward the US economy as well, otherwise my blog wouldn’t be named Credit Writedowns. However, I see the facts as they are presented – and this report was very bullish.
Not only did new orders tick up, but a number of other data points show expansion: production, supplier deliveries and order backlogs, in particular. You should also note that the ISM data suggests the overall economy is growing for a third month in a row.
Given this data and other recent bullish economic reports, don’t be surprised if Q3 GDP change prints a positive number. If it does, it is very likely that the recession is all but over right now. Mind you, I still am talking about a weak Q4 or Q1 2010 recovery and possible double dip. But, I am aware that it is mostly upside economic risk that is apparent in the US. The data cannot be ignored. And right now, it is very bullish.
Manufacturing ISM Report On Business – ISM website
Ed, how do you deduce that new order flow shows more than just inventory restocking? It seems like that is just confirmation of the aforementioned fact. What specifically suggests to you that this might be “something more,” if you will. TIA your thoughts are always appreciated
How does the time-of-year normally affect these figures? Do they normally swing the same direction? Could there be some seasonal bias in them?
The recent real estate “upswing” quoted by many seems so. A June-August uptick in home sales is a normal and expected seasonal swing. US gas consumption also normally rises from Memorial day (May 25) through Labor day (first Monday in September) during the summer driving season.
As you know I am highly suspect of green shoots figures. In light of surrounding figures (CRE, unemployent, trade, etc, etc) and the trillions of US dollars dumped into the economy – artifically and temporarily making up for a shortfall in consumer and industry demand – I see no light at the end of the proverbial tunnel yet and find many of these stats more of the old “lies, damn lies, and statistics” bit than reliable data points to form a summary.
ISM say nothing about the magnitude. The Cass Frieght Index continues to show flattness in shipments and expenditures.
There may be some improvements in sentiment, but respondents were not suggesting economic expansion and I think it is showing a change from decline to stabilisation. Most worrying is a paradigm shift in inventories which I think is being miscalculated and could pose a risk of a change in sentiment during September. We should also not forget that although manufacturing numbers are utmost in these people’s minds there may be some impact from media green shoot cheerleading.
Two thirds of industry does not expect orders to grow and the third that do, does not include food, beverage, wood products any many purely consumer products. Some will be as a result of the clash for clunkers and some appears to be linked to improving fortunes for China.
Perhaps more worrying is that many manufacturers think their customers are under stocked. This I think is more of a paradigm change in retailers thinking rather than a reality. This links into the 95 percent of manufacturers who expect to hold the same or less inventories.
On employment then the number of firms expecting to cut employment has reduced, yet it is still higher than those who expect to take on more workers which has moved slightly but is still in the basement.
It is interesting that prices are expected to rise and I wonder whether this is an expectation of more pricing power or that the dollar will fall. Price increase expectations also look anaemic for most consumer related goods.
The backlog of orders has not really moved at all apart from a few (5 percent) expecting things to remain the same rather than decline. Most businesses expect imports and exports to remain the same as well.
No sign of any V shaped recovery here yet.