PMI Pointing to Muddling Growth

The Institute of Supply Management (ISM) released the results from the latest Purchasing Managers' Index (PMI) earlier this morning. The print was 50.7, essentially in line with the consensus estimate of 50.5. The December print 1.2 points better than November results, largely on gains in employment and supplier deliveries. The table from the December PMI report is shown below.

MANUFACTURING AT A GLANCE DECEMBER 2012
Index	Series Index Dec	Series Index Nov	Percentage Point Change	Direction	Rate of Change	Trend* (Months)
PMI™	50.7	49.5	+1.2	Growing	From Contracting	1
New Orders	50.3	50.3	0.0	Growing	Same	4
Production	52.6	53.7	-1.1	Growing	Slower	3
Employment	52.7	48.4	+4.3	Growing	From Contracting	1
Supplier Deliveries	54.7	50.3	+4.4	Slowing	Faster	2
Inventories	43.0	45.0	-2.0	Contracting	Faster	2
Customers' Inventories	47.0	42.5	+4.5	Too Low	Slower	13
Prices	55.5	52.5	+3.0	Increasing	Faster	5
Backlog of Orders	48.5	41.0	+7.5	Contracting	Slower	9
Exports	51.5	47.0	+4.5	Growing	From Contracting	1
Imports	51.5	48.0	+3.5	Growing	From Contracting	1

Overall, this was an 'OK" report. On the negative side, production rates declined, as order rates remained flat with November. In addition, the customer inventory level ticked up to 47 from 42.5. I think this is key on forward looking basis, as it suggests flattish future order growth rates. Backlog levels continue to decline, which may pressure future production rates if orders do not rise. This is while prices paid for inputs ticked up, which if the trend continues (up for five months) could crimp margins. The prices paid component is not overly worrisome yet, and I would not get concerned until the component measure ticks up into the 60's.

On a more positive note, the export measure increased a full 4.5 points and showed growth in the month. This adds further credence to the evidence that some areas of the global manufacturing environment are improving. In addition, inventories declined at a faster rate in the month.