ISM Report Bucking The Trend
Today's release of the Institute of Supply Management's survey of the manufacturing business posted a better than expected increase of 54.8 versus last month's reading of 53.4. Overall, the report was surprisingly positive showing increases in new orders which jumped to 58.2 from 54.5 last month. Production was strong and employment increased. Most interestingly was the increase in export orders despite weakness in Europe and the slowing in China. Inventories declined which is a positive and points to the need for future orders in order to replenish inventories. The negative was the "prices paid" component which remained elevated. Higher levels of prices being paid out ultimately impacts profit margins.
This report, however, is a bit of head scratcher given the weakness in a variety of previous manufacturing related weakness in recent weeks. Here is the rundown of the recent reports so far:
- Chicago Fed National Activity Index (a broad index of 85 components) declined from .07 to -0.29 in March
- Chicago PMI declined from 62.20 to 56.20 in April.
- Richmond Fed Manufacturing Index increased from 7 to 14 in April. This was a rebound after a sharp decline of 20 to 7 in March.
- New York Fed Manufacturing Index decreased from 20.21 to 6.56 in April
- Philadelphia Fed Manufacturing Survey dropped from 12.5 to 8.5 in April
- Dallas Fed Business Activity Index declined from 10.8 to -3.4 in April
- Kansas City Fed Manufacturing Index dropped from 9 to 3 in April
The chart shows the average of the reports above from October until present versus the ISM Purchasing Managers Index. As you can see the ISM was tracking fairly closely during last year but has recently diverged increase sharply while the major manufacturing surveys has posted declines.
This recent diversion is not a new event. In the chart you can see the ISM PMI versus the Streettalk PMI Manufacturing Composite (less the ISM PMI) running back to 1990. As you can see the ISM along with the composite index have historically maintained a very high correlation. When there has been divergences in the past they are generally corrected within about a month or two.
While the ISM report today was very good the recent slow down that we have seen in Europe and China is likely going to lead to a decline in exports here in the U.S. in the coming months. While the idea that the U.S. can economically disconnect itself from the rest of the globe is very optimistic the reality is that 20% of our current economy depends on exports to the Eurozone which is quickly slipping into recession. Very likely, the next few months are going to show continued weakness in the manufacturing numbers as the Eurozone struggles with economic growth.
This is important to understand. The economy is currently growing, however, it is not growing strongly enough to offest the impact of an economic shock whether it is a credit event, natural disaster or economic impact. This is well understood by the Fed which is why, despite stock market rallies and economic enthusiasm by the media, they continue to maintain a zero interest rate policy and keep the door open to further "stimulative action."
It is always most important not to view the data from one month to the next. The ISM report today, while good, is well below last year's peak levels at a time when the economy is supposed growing better. This is opposed to the manufacturing composite index which is now rolling over from a previous peak. The next couple of months will likely tell us much about the underlying strength of the economy particularly as the boosts from the weather related effects and lower utility costs are removed from the system.
While the ISM PMI report is bucking the trend of the other reports currently the sustainability is the key. With the recent spate of weakness in a broad range of economic reports as of late it is likely that we will see a reversal of the PMI within the next month or two.