The June 2010 ISM Manufacturing Survey is out and PMI came in at 56.2%. This is a decline of -3.5% from last month's 59.7%. While this is the 11th month for expansion (anything above 50 is an expansion), this is a slowing on the manufacturing ISM. Why is this important? There is a relationship to overall GDP growth. The below GDP correlation numbers are annual. Taken to quarterly, the PMI correlation implies rough 2.2% Q2 2010 GDP. A correlation is not a fact so take this number with a wet thumb in the air.
The past relationship between the PMI and the overall economy indicates that the average PMI for January through June (58.5 percent) corresponds to a 5.5 percent increase in real gross domestic product (GDP). In addition, if the PMI for June (56.2 percent) is annualized, it corresponds to a 4.8 percent increase in real GDP annually.
Hiring while still positive, with a 57.8, is -2.0% lower than last month. Below is the ISM manufacturing employment graph, normalized to zero, so show the Manufacturing ISM employment expansion and hiring trend.
The ISM neutral point is 50. Above is growth, below is contraction, although the ISM is this report is noting some variance in the individual indexes (see report). For example, A PMI above 42, over time, also indicates growth.
|MANUFACTURING AT A GLANCE
|Customers' Inventories||38.0||32.0||+6.0||Too Low||Slower||15|
|Backlog of Orders||57.0||59.5||-2.5||Growing||Slower||6|
Below is the graph, normalized to 50, on new orders. New orders dropped -7.2% to 58.5 in June. This is a major slowing on new orders, although above 50 is still an expansion, that growth slowed dramatically.
Prices had a dramatic, -20.5 point drop from last month.
The ISM Prices Index registered 57 percent in June, 20.5 percentage points lower than the 77.5 percent reported in May. This is the 12th consecutive month in which the Prices Index has registered above 50 percent. While 32 percent of respondents reported paying higher prices and 18 percent reported paying lower prices, 50 percent of supply executives reported paying the same prices as in May. A Prices Index above 49.3 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices.
Production, graphed below, normalized to 50, was 61.4, a decrease of -5.2% from last month another glowing in the rate of growth.
Inventories, in the below graph (normalized to zero), contracted slower than last month, almost flat, to 45.8%. This is consistent with supplier's being slow on deliveries of raw materials to manufacturers, -3.7%. Inventory level changes were 69% of Q2 2010 GDP.
Below is what the ISM says about this month's numbers:
The manufacturing sector continued to grow during June; however, the rate of growth as indicated by the PMI slowed when compared to May. The lower reading for the PMI came from a slowing in the New Orders and Production Indexes. We are now 11 months into the manufacturing recovery, and given the robust nature of recent growth, it is not surprising that we would see a slower rate of growth at this time. The sector appears to be solidly entrenched in the recovery. Comments from the respondents remain generally positive, but expectations have been that the second half of the year will not be as strong in terms of the rate of growth, and June appears to validate that forecast.
Last month's report overview is here.