August ISM- the bad and the ugly.

The Institute of Supply Management (ISM) reported their August Manufacturing ISM Report on Business earlier this morning. The figures do not paint a pretty picture for the current period or for the months ahead.

MANUFACTURING AT A GLANCE AUGUST 2012
Index	Series Index Aug	Series Index Jul	Percentage Point Change	Direction	Rate of Change	Trend* (Months)
PMI™	49.6	49.8	-0.2	Contracting	Faster	3
New Orders	47.1	48.0	-0.9	Contracting	Faster	3
Production	47.2	51.3	-4.1	Contracting	From Growing	1
Employment	51.6	52.0	-0.4	Growing	Slower	35
Supplier Deliveries	49.3	48.7	+0.6	Faster	Slower	7
Inventories	53.0	49.0	+4.0	Growing	From Contracting	1
Customers' Inventories	49.0	49.5	-0.5	Too Low	Faster	9
Prices	54.0	39.5	+14.5	Increasing	From Decreasing	1
Backlog of Orders	42.5	43.0	-0.5	Contracting	Faster	5
Exports	47.0	46.5	+0.5	Contracting	Slower	3
Imports	49.0	50.5	-1.5	Contracting	From Growing	1

The PMI of 49.6 was lower than the 50 expected by the consensus. This is the third straight month the PMI has shown a contraction in the manufacturing sector. The lower-than-expected PMI was largely driven by lower new orders and reduced production rates.

Looking ahead, I would expect both production and new order rates to remain weak. Export activity remains in a contraction, suggesting that the World economy remains weak. Just as important, import activity contracted in August versus an expansion in July. In my mind, this suggests a further slowing in the domestic economy. It also suggests, in my opinion, further weakness for the economies of our trading partners. Ominously, the customer inventories index remains toward the high-end of the historic range. Using history as a gauge, a high reading of the customer inventories index suggests weakness (or a continuation there of) in new orders in future months. A continued contraction in new orders will hurt production rates, unless offset by strong order backlogs. That said, order backlogs have declined for five straight months, and fell at a faster pace in August versus July. This is occurring while manufacturing inventories are growing, suggesting an even deeper contraction in order/production rates absent a rebound in demand. This backdrop is occurring while prices/costs are said to have increased significantly in August, leaping more than 14 points in the month, now in an expansionary phase. This is a negative report all around and suggests that the weakness in manufacturing will continue.