Sunday, September 05, 2010

A Macro-View: ISM Report August 2010

Headline Numbers:
The August 2010 Manufacturing ISM Report On Business® clearly had a positive effect on the markets as noted at Stocks Rise on Bullish Economic Vibes. Although it was not a dramatic increase but acceptable at .8% to an index of 56.3%, it beat the consensus expectations that were expecting a slow down in growth. MarketWatch noted on its calendar of 53.3% and Econoday stated it as 53.0% with a range of 51.5 to 54.5 percent
here. Econoday said the report was solid but did state that new orders could be a concern going forward as this in an important "leading index" of the overall report numbers. They refined that statement by stating, "The slowing in order build is certain to limit future improvement in business activity."

While the manufacturing ISM index was even above the consensus range, the Non-Manufacturing ISM Report On Business® was below the consensus range provided by Econoday {Econoday Report: ISM Non-Mfg Index September 3, 2010} in the range of 52.0 to 54.5 percent to a headline index of 51.5% which represented a drop of 2.8% from the previous month. The consensus on Econoday was 53.0 and MarketWatch noted it as 53.5 percent.

The average for the manufacturing index over the last 12 months was 56.6 and for non-manufacturing it was 52.3 percent. Both indexes were below the average.

Breakdown of Important Indicators.
1. New Orders Indexes for both reports grew but at a slowing rate with the services report showing the greatest percentage drop of 4.3% to 52.4% and manufacturing dropping just 0.4% to 53.1%. Both reports do show a trend downward in number of firms that are reporting better/higher new orders, since at least May. While not good, this is too early to start wringing hands over "double-dip recession" fears.

2. Employment Index Reports provided a mixed bag as manufacturing showed even stronger growth than previous months with an increase of the index to 60.4%, which was a rise of 1.8%. Services though showed that it could not maintain positive growth and dropped below 50% to 48.2%. Employment in services has not shown any clear trend and has flirted with the 50% since around February 2010 when it reached 48.6%. It is worth noting that even though manufacturing is very strong, it is doubtful this can turn around the anemic labor market in the USA, and services while bad for falling under the 50 mark is something we should see if this was just random noise and not a trend in the wrong direction.

3. Price Indexes jumped significantly for both sectors and both ended up above 60%. Manufacturing showed a 4% increase to 61.5% and services showed a whopping increase of 7.6% to 60.3%. Interestingly, the number of firms reporting higher prices has been decreasing since at least May 2010 {for both reports} and most of that change has resulted in more firms reporting that prices are the same. This could indicate that price increases are becoming more concentrated into specific sectors and specific commodities. Which on one hand could indicate the formation of "bottlenecks" and areas for increased investment opportunities but on the other hand sectoral inflation implications. That is, inflation could spill-over from certain sectors to others and create a vicious cycle of inflation. Doubtful in our open, somewhat flexible economy, but still possible as the 1970s showed.

From the section on commodities, there does not seem to be too many problems in the manufacturing report as commodities up and down in prices were the same at 3 commodities listed and only one in short supply. The services report was different as it noted that 15 commodities were up in price and none down and only one commodity in short supply. The fact of so many commodities are higher in price for services sectors could explain some of the reason for lackluster performance lately.

4. New Export Orders and Imports are naturally considered intertwined in analysis but we must be careful not to assume that they are the same in both reports and can have the same logical analysis applied. For example the article linked above titled "Stocks Rise on Bullish Economic Vibes" quoted the Dismal Scientist as stating: "The gap between new export and import orders suggests trade will provide little support, if any, to growth this quarter." While it is true that imports are a negative for calculating GDP, imports and exports in the manufacturing sectors are hardly the numbers to draw such conclusions from. A lot more of the economy is involved in imports than just manufacturing. If the economy is expanding in the normal method then even if new export orders were not increasing {i.e. less than 50% on index}, it still might be desirable that imports were greater than 50 as this prevents significant bottlenecks from restricting growth.

So then as far as the numbers go, the manufacturing report noted a slight drop {1%} in new export orders to 55.5% and an increase of 4% higher to 56.5% in imports. The non-manufacturing report gave more ominous signs as new export orders index dropped 5.5% to below the 50 mark of 46.5% and imports rose to 50.5% which is an increase of 2.5%. But the services sectors numbers are also skewed by the fact that 67% of respondents do not report in the category of "New Export Orders" and 60% do not report on import numbers.

World-Wide Manufacturing Activity
The Wall Street Journal published an interesting table on the Purchasing Managers Index (PMI) for a variety of countries at
here. A couple of important things to consider on the table is that while 5 nations were expanding faster on rate of change, 15 were expanding slower. So the question becomes is whether the slowing rate of expansion will lead to more countries joining the contracting group that two entered into last month {Brazil, Taiwan}. Also, the fact that China is one of the expanding faster PMIs, but it only raised up to 51.7, makes me wonder how they could have GDP growth of excess of 10%. If manufacturing is their engine of growth then how can their raw numbers look so weak and still maintain such meteoric growth rates?

UK PMI Reports
David Smith, Economics Editor of The Sunday Times, London, provides a bit of commentary and links to the UK's manufacturing and services PMI reports at Manufacturing growing - but more slowly and Significantly weaker services. From the Wall Street Journal, we already saw that the manufacturing report was 54.3 which signified a drop of 2.6 and the report noted this was a nine month low for the index.

On certain factors, Anglo-Saxon nations tend to have high correlations for example in short-termism in financing which this general phenomenon has sometimes been called the Anglo-Saxon disease. Thus, it might be worthwhile to look at some of the report's main points and compare them with the US numbers.

Services sectors in both countries were losing momentum from the most recent recovery and the trend line has been generally slower growth in the economy. David Noble, CEO at Chartered Institute, states it as "stuttering growth" but feels it is too early to predict a double-dip recession. Chris Williamson, Chief Economist at Markit, also states a double-dip is unlikely but with this report the chances become higher. He also states, "The service sector is struggling to sustain momentum after a buoyant second quarter." Employment also dipped below the 50 point with a "marked and accelerated rate". Input costs have accelerated rate of inflation. All that is similar to what the US is experiencing in the services sectors also.

One of the key points from the services PMI, was that uncertainty in the economy is "undermining prospects for new contracts". Some of the uncertainty in the manufacturing is derived from "the looming public sector spending cuts", according to David Noble. This in turn is "keeping UK manufacturers on tenterhooks and slowing the pace of the recovery." Employment continues to be strong in both countries but there was a divergence in both the headline indexes as the US expanded growth and the UK experienced slowing growth rates. Input prices continue to put upward pressures on inflation and the UK reports note that output prices have been rising for 10 months. There is no comparable statistic in the US ISM reports on output prices.

Both countries are experiencing or at least talking about uncertainty but it seems in different ways. The US is more consumed with the government enacting more legislature that could change the business climate and in a way change input prices for businesses. Take for example a cap and trade bill would significantly alter input prices and make certain investments negative NPV and others positive. The UK {from the reports} seem more concerned about austerity measures that will change specific projects and thus the basket of outputs directly. Every country desires to use export markets to increase demand and thus GDP. Rob Dobson, Senior Economist at Markit, states it as, "hoped for support from exports has been fizzling out in recent months."

What does it all mean?
It is a little early to talk about double dip and the deflationistas may want to look at this data before coming to the conclusion that Krugman draws, that is that we are headed {trending} toward deflation. He wants and demands that everything be done to prevent this including getting helicopter Ben to drop a few trillion here and there and having the Federal Government spend, spend, spend...

Every country is trying to promote exports but if everyone is trying the same tactic at the same time, it is unlikely to work well. Until the global imbalances rectifies, export promotion is also to be a hit and miss proposition. In the US, manufacturing is helping the recovery, but until we see solid employment growth in the services sectors, we are unlikely to see dramatic growth in GDP for the mean time.

MarketWatch consensus forecast data:
ISM 53.2%
Consensus Consensus Range Actual
ISM Mfg Index - Level 53.0 51.5 to 54.5 56.3

ISM services 53.5%
Consensus Consensus Range
Composite Index - Level 53.0 52.0 to 54.5

Calculated Risk: Construction Spending declines in July

The Press Isn’t Talking Us Into a Recession - Real Time Economics - WSJ

Surprising Many, Manufacturing Is Bright Spot - Real Time Economics - WSJ

Calculated Risk: Some comments on August ISM Manufacturing Index

David Smith's Significantly weaker services

Calculated Risk: ISM Non-Manufacturing Index declines in August

Misc. Links:
Mish's Global Economic Trend Analysis: Jobs Decrease by 54,000, Rise by 60,000 Excluding Census; Unemployment Rises Slightly to 9.6%; A Look Beneath the Surface

America's jobless recovery: Labour market perspectives | The Economist


macroblog: Optimism…pessimism…and a bit of perspective

Payrolls: Flat is the new up | Analysis & Opinion |

Relief in the Temp Sector - Real Time Economics - WSJ

Calculated Risk: Employment-Population Ratio, Part Time Workers, Unemployed over 26 Weeks

A Look at the Annointed Leaders Financials and Housing (XLF)

Obama: Jobs Report ‘Positive’ But ‘Not Good Enough’ - Washington Wire - WSJ

Economists React: Jobs Report ‘Stronger-Than-Expected, Yes, Strong, No’ - Real Time Economics - WSJ

Taking a Prudent Course - The Entrepreneurial Mind

Calculated Risk: U.S. Light Vehicle Sales 11.5 Million SAAR in August

Stephen Williamson: New Monetarist Economics: Liquidity Traps and Inflation Traps{Krugman deflationistas}

America's jobless recovery: Recovery summer | The Economist

Calculated Risk: MBA: Purchase Application activity suggests low level of existing home sales in August and September

Calculated Risk: ADP: Private Employment decreases 10,000 in August

BBC - Stephanomics: People power

Fiscal policy: Is economics a right wing conspiracy? | The Economist

Jobs ... but low pay

Economist's View: Does the Recovery Depend on Housing?

Mish's Global Economic Trend Analysis: Weekly Unemployment Claims Drop to 473,000, Last Week Revised Up to 504,000; 4-Week Average Rises to 486,750

Calculated Risk: Richmond Fed: Manufacturing Growth Continued to Ease in August

Empire State Manufacturing Survey (overview) - Federal Reserve Bank of New York

Calculated Risk: Kansas City Fed: Manufacturing activity slowed in August

CBO Report-Stimulus:
Director's Blog » Blog Archive » Estimated Impact of the Stimulus Package on Employment and Economic Output

Economist's View: CBO: Estimated Impact of the Stimulus Package

Calculated Risk: CBO: Stimulus raised GDP 1.7% to 4.5% in Q2

How much it stimulates and what it stimulates

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