ISM - Manufacturing Contracts for the 2nd Month in a Row - PMI 49.8% for July 2012

The July 2012 ISM Manufacturing Survey PMI increased, +0.1 percentage points, to 49.8%, but is still in contraction, the 2nd month in a row. Previously PMI showed 34 months of growth and this month's PMI shows June was not a fluke. In July 2009 the PMI registered 49%. Employment this month dropped -4.6 percentage points and new orders are still in contraction.



Comments from ISM survey respondents were mixed. Yet overall the survey respondents reflect a slowing economy and economic uncertainty. This comment, from Computer & Electronic Products, is most telling:

Forecasts remain high, but actual bookings remain flat.

New Orders increased 0.2 percentage points, to 48.0%. New Orders inflection point, where expansion turns into contraction, is not 50, it is 52.3%.

A New Orders Index above 52.3 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders.



PMI is a composite index on manufacturing. Here's how the ISM defines PMI:

The PMI is a composite index based on the seasonally adjusted diffusion indexes for five of the indicators with equal weights: New Orders, Production, Employment, Supplier Deliveries and Inventories.

Below is the ISM table data, reprinted, for a quick view.

Manufacturing at a Glance July 2012
Index July June % Point Chg. Direction Rate Trend
PMI 49.8 49.7 +0.1 Contracting Slower 2
New Orders 48.0 47.8 +0.2 Contracting Slower 2
Production 51.3 51.0 +0.3 Growing Faster 38
Employment 52.0 56.6 -4.6 Growing Slower 34
Supplier Deliveries 48.7 48.9 -0.2 Faster Faster 6
Inventories 49.0 44.0 +5.0 Contracting Slower 4
Customers' Inventories 49.5 48.5 +1.0 Too Low Slower 8
Prices 39.5 37.0 +2.5 Decreasing Slower 3
Backlog of Orders 43.0 44.5 -1.5 Contracting Faster 4
Exports 46.5 47.5 -1.0 Contracting Faster 2
Imports 50.5 53.5 -3.0 Growing Slower 8
OVERALL ECONOMY Growing Faster 38
Manufacturing Sector Contracting Slower 2


Production, which is the current we're makin' stuff now meter, increased 0.3 percentage points from last month to 51.3%. While technically not a contraction, production loosely correlates to the Federal Reserve's industrial production, but not at 50%, instead 51.2% to indicate growth. So, take ISM production to be breaking even this month.

This indicates growth for the 37th consecutive month. An index above 51.2 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures.



The manufacturing ISM employment index plunged -4.6 percentage points to 52.0%. The neutral point for hiring vs. firing is 50.1%. As we noted last month, Employment is a lagging indicator, so expect more declines.

Below are the BLS manufacturing non-farm payrolls (jobs) for the past decade on the left, in red, graphed against the ISM manufacturing employment index on the right, in blue. The BLS number is simply raw manufacturing jobs tally, from the CES, not taking into account population growth or overall sector shrinkage as well as time lag. One can eyeball a slight correlation in the middle of the decade, yet note the divergence this recovery, starting late 2008.



Inventories popped up +5.0 percentage points to 49.0%. Inventories are contracting, for the 4th month in a row. The ISM claims inventories are correlated to manufacturing inputs, that are part of GDP. Changes in private inventories added +0.32 percentage points to Q2 2012's 1.5% GDP, but this is all inventories, not just manufacturing.

An Inventories Index greater than 42.8 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis' (BEA) figures on overall manufacturing inventories.



Supplier deliveries are how fast manufacturers can get their supplies. A value higher than 50 indicates slower delivery times, a value below 50 means the supply chain is speeding up. The index decreased -0.2 percentage points to 48.7% and the ISM reports this it the 6th month supplier deliveries have been faster.



Backlog of orders dropped another -1.5 percentage points to 43.0% and are in contraction. Order backlogs are exactly what they sound like and only 86% of survey respondents reported on order backlogs.



Imports dropped -3.0 percent points to 50.5%. Imports are materials from other countries manufacturers use to make their products.



New orders destined for export, or for customers outside of the United States, dropped another -1.0 percentage point to 46.5% and is in contraction, the 2nd month in a row. Export new orders last contracted in June 2009. The exports index is also lower than June 2009's 49.5% and was in growth up to this point for 35 months. Here we can see Europe and Asia's slowdown affecting the United States.

The four industries reporting growth in new export orders in July are: Fabricated Metal Products; Electrical Equipment, Appliances & Components; Chemical Products; and Computer & Electronic Products. The eight industries reporting a decrease in new export orders during July — listed in order — are: Textile Mills; Furniture & Related Products; Paper Products; Miscellaneous Manufacturing; Machinery; Transportation Equipment; Primary Metals; and Apparel, Leather & Allied Products. Six industries reported no change in export orders in July compared to June.



Prices popped up a bit by +2.5 percentage points to 39.5%, although this value is still in contraction, the 3rd month in a row. Prices are what manufacturers pay to make their products. In April 2009 the price subindex was 32%. In the previous two months prices plunged a total of 24 percentage points.



Customer's inventories increased +1.0 percentage points to 49.5%. Below 50 means customer's inventories are considered by manufacturers to be too low. Customer inventories, not to be confused with manufacturer's inventories, is how much customers have on hand, or rates the level of inventories the organization's customers have. An increase might indicate weak demand.



Here is the ISM industrial sector ordered list of growth and contraction:

Of the 18 manufacturing industries, seven are reporting growth in July in the following order: Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Primary Metals; Petroleum & Coal Products; Fabricated Metal Products; Food, Beverage & Tobacco Products; and Furniture & Related Products. The 11 industries reporting contraction in July — listed in order — are: Nonmetallic Mineral Products; Apparel, Leather & Allied Products; Wood Products; Textile Mills; Miscellaneous Manufacturing; Chemical Products; Transportation Equipment; Printing & Related Support Activities; Paper Products; Machinery; and Computer & Electronic Products.

The ISM has a correlation formula to annualized real GDP, but they are now noting the past correlation. Notice also that the PMI went to equal weighting in 2008. Annualizing July's data, the ISM get a 2.4% 2012 annual real GDP. The below graph plots real GDP, left scale, against PMI, right scale. One needs to look at the pattern of the two lines to get anything out of this graph. If they match, GDP goes up, PMI goes up, would imply some correlation.



The ISM neutral point is 50, generally. Above is growth, below is contraction, There is some some variance in the individual indexes and their actual inflection points. For example, A manufacturing PMI above 42, over time, also indicates growth, even while manufacturing is in the dumpster.

Here is last month's manufacturing ISM overview, unrevised.

The ISM has much more data, tables and analysis on their website. For more graphs, see St. Louis Federal Reserve Fred database and graphing system.

PMI stands for purchasing manager's index.

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