Monday, December 06, 2010

A Macro View: ISM Reports November, A New Normalcy?

Normalcy is the best way to describe the ISM reports for November. The indexes show a steady growth for both the manufacturing and non-manufacturing sectors. Econoday states it as following for both sectors.
ISM Non-Mfg Index:
This report falls in line with the run of other data, this morning's employment report excluded, that are pointing to moderate, steady economic growth ahead. {1}

ISM Mfg Index:
This report points to a rebound for factory data which proved soft in last week's durable goods report. {2}

While there are still concerns about price increases for inputs, shortages of commodities and delays in supplier deliveries, overall the report fell into acceptable and predictable ranges. Econoday reports that the consensus estimate for headline index was right on the money for the non-manufacturing index at 55.% {range 54 to 58%} and for the manufacturing index it missed the consensus by .4% with the actual being 56.6 {range 55.5 to 57.2%}.

Manufacturing Concerns Going Forward. {3}
Both reports are marked by very few drastic changes in the indexes and most being on the positive side of the 50 mark, which indicates growth in the sectors. Manufacturing showed the most changes with production dropping 7.7% to 55% and supplier deliveries jumping 6% to 57.2%. Both negative indicators going forward. The production is still in very positive territory with 55%, but the problem is that this seems to be a fragile indicator going forward. This last month has shown that less respondents said production was increasing and more respondents said production was decreasing resulting in a net drop of gainers over losers of 17% to just 6% over last month. Also six industries reported growth but even more at 7 industries reported decreases in production. It looks like growth is narrowing in a range of sectors while slowdowns are broadening.

The slowing of supplier deliveries portends structural rigidity in the economy. Not much has changed in regards to input commodities as 8 commodities were multiple months on the list out of the 16 listed for manufacturing and commodities of short supply added two new ones. Similar results are also noted in the non-manufacturing report with 7 commodities of multiple months out of the 16 listed.

Non-Manufacturing Concerns Going Forward. {4}
Most of the indexes maintained a positive stance with only marginal differences from last month. Just as manufacturing, the business activity/production was off by 1.4% but still stayed at an acceptable level of 57%. The one index that made a move crossing the 50 mark on either report was inventories as it increased 4% to 51.5%. This could be a negative indicator going forward, but the reports do not indicate whether this is planned increases in inventory or unplanned. From at least one of the respondents, it seems to indicate a change to positive expectation and as such it could be a positive sign. The respondent stated: "Expect higher sales in November and December" and "Increased business activity."

Summary of Positive Signs.
The headline non-manufacturing index (NMI) is on an upward trend since August 2010 lows of 51.5 to last month of 55%. It has been even higher multiple times than last months showing this year but did maintain above the average for the last 12 months of 53.5%. Price indexes decreased for both sectors, dropping 5.1 to 63.2 for non-manufacturing and 1.5 to 69.5% for manufacturing. Although a significant drop in non-manufacturing, they both are very high in the 60s. Manufacturing employment index adjusted marginally down and maintained an acceptable level at 57.5%, but non-manufacturing may have broken out of its stagnating neutral stance since around February of this year. The employment index jumped 1.8 to 52.7% for a increasing trend since August this year with a low of 48.2%. Below is a chart of the non-manufacturing index from February of this year with a linear trend line drawn. (Click on table for clearer image.)

The trend line is just ever so slightly up from a flat line and most of that is due to the last three months being above the 50 mark. The economy needs this trend to continue if it is to significantly reduce unemployment.

New export orders for non-manufacturing jumped 4 to a very respectable 59.5, which surpasses the manufacturing index that dropped 3.5 to 57%. Both very acceptable levels which fueled some positive comments from respondents. Some of the positive comments are quoted below:
Manufacturing ISM Report
"Business continues to improve; however, rising material prices are eroding margin. Increases to the consumer are inevitable in early Q1 2011." (Paper Products)
"International markets expanding rapidly. Domestic market is slowly rebounding." (Transportation Equipment)
"Capital projects are being released, which is improving our sales." (Computer & Electronic Products)

Non-Manufacturing ISM Report
"Business remains steady; outlook for fourth quarter is good." (Information)
"Trending favorable — see more activity toward additional staff and capital expenditures for 2011." (Finance & Insurance)
"Business is stable. Customers are exerting a lot of pressure to lower prices." (Agriculture, Forestry, Fishing & Hunting)

The New Normal?
The ISM reports are signaling an economic recovery with steady growth. Hopefully this translates into the correlation that Norbert J. Ore stated in the manufacturing report.
Ore stated, "The past relationship between the PMI and the overall economy indicates that the average PMI for January through November (57.3 percent) corresponds to a 5.1 percent increase in real gross domestic product (GDP). In addition, if the PMI for November (56.6 percent) is annualized, it corresponds to a 4.9 percent increase in real GDP annually."

Obama fears that we may be into a "new normal" with high unemployment rates but contrasted with high levels of profits for businesses. {5} This could signify that the US is facing structural rigidity as businesses are not adapting and investing since expectations have not drastically changed. While more tax breaks to businesses might be helpful, it has more to do with signaling to the markets positive signs. Like delaying what the tax rates will be next year, that certainly is not a way to inspire confidence in the markets.

1. Econoday Report: ISM Non-Mfg Index December 3, 2010

2. Econoday Report: ISM Mfg Index December 1, 2010

3. ISM - Media Release: November 2010 Manufacturing ISM Report On Business®

4. ISM - Media Release: November 2010 Non-Manufacturing ISM Report On Business®

5. Obama Fears `New Normal' Economic Recovery of High Profits, No Job Growth

5a. Obama Warns of ‘New Normal’ for Economy

Supply Excellence — How to Read the Data: ISM Manufacturing Orders vs Inventory

Misc. Links:
Economists React: ‘Painful Reality Check’ on Jobs - Real Time Economics - WSJ

A Wall Street Journal Column Understates the Size of U.S. Manufacturing | Cato @ Liberty

Management: How the enterprises trashed the economy | The Economist

Mish's Global Economic Trend Analysis: SpendingPulse: Retail Sales Led by Apparel, Consumer Electronics and Appliances Down

Calculated Risk: Hotels: RevPAR up 10.1% compared to same week in 2009

Calculated Risk: Catching Up: ISM Non-Manufacturing index showed expansion in November

Is the ISM 'New Orders to Inventories' Ratio Sending Recession Warning? - Seeking Alpha

Unemployment Issues:
Mish's Global Economic Trend Analysis: After All the Hype, Jobs Up an Anemic 39,000; Unemployment Rises to 9.8%; Quicksand of Stimulus
Manufacturing payrolls dropped by 13,000 in November, the most in three months. Economists had projected an increase of 5,000.

Does One Month Make a Trend? -

Calculated Risk: Employment Summary and Part Time Workers, Unemployed over 26 Weeks

Why Didn’t Retailers Hire?

CARPE DIEM: Bright Spots: Temp Help and Mfg. Overtime Hours; But Jobless Recovery May Continue to 2012

America's jobless recovery: Where are the jobs? | The Economist

The urgency of bringing down unemployment

Economist's View: Stop the Unemployed from Becoming Unemployable

Employment %
Higher %
Same %
Nov 2010 16 73 11 52.7
Oct 2010 13 69 18 50.9
Sep 2010 15 68 17 50.2
Aug 2010 13 69 18 48.2
Jul-10 17 73 10 50.9
Jun-10 18 70 12 49.7
May-10 22 65 13 50.4
Apr-10 22 61 17 49.5
Mar-10 16 65 19 49.8
Feb-10 12 68 20 48.6
Jan-10 10 62 28 44.6
Dec-09 9 70 21 43.6

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