The Institute of Supply Management (ISM) released the November Purchasing Managers' index (PMI) earlier this morning stating that the PMI declined by 2.2 points to 49.5, suggesting that manufacturing activity declined in November. The Street, in contrast, was looking for a much stronger reading of 51.4. I think many investors looked at the latest results as a significant negative.
My take is that the weakness in the report should not be a surprise. As I discussed last month, the growth in the October PMI masked underlying weakness in the component measures, all discussed here. In addition, the path of the PMI in recent months has not been one of great strength, but one suggesting that the manufacturing environment is floundering around anemic growth and slight declines.
The PMI from January 2000 through the present
That said, this month's report is not all negative, but one that I would characterize as more of a mixed bag. On the negative side, manufacturing employment contracted in November. To me this suggests that either manufacturers are worried about increased costs due to the healthcare law, increased taxes, and the like or are seeing some permanence in slowing activity. In addition, production rates appear to have borrowed from order backlogs again. The production index increased by 1.3 points to 53.7 while the backlog figures fell by 0.5 points to 41, the later suggesting a faster contraction in order backlogs versus last month. A contraction in backlogs tends to lead a fall in production rates, that is without any subsequent increase in new orders.
As for new orders, order rates increased at a slower pace in November versus October, as the new order index of 50.3 fell by nearly 4 full points month-over-month. However, new orders still increased. Looking ahead, I think new order rates will likely be dependent on the economy. Right now there is just too much noise in the customer inventories index to say with a high degree of confidence as to the path of future new orders. The current customer inventories index measure was 42.5, which according to my research suggests higher new order rates in future periods. However, this level follows a four period where customer inventory index levels of 49 or above suggest that channel inventories were too high. Taken as a whole, the last few months of customer inventory index levels probably suggests continued meandering of manufacturing activity.
My take is that the weakness in the report should not be a surprise. As I discussed last month, the growth in the October PMI masked underlying weakness in the component measures, all discussed here. In addition, the path of the PMI in recent months has not been one of great strength, but one suggesting that the manufacturing environment is floundering around anemic growth and slight declines.
The PMI from January 2000 through the present
That said, this month's report is not all negative, but one that I would characterize as more of a mixed bag. On the negative side, manufacturing employment contracted in November. To me this suggests that either manufacturers are worried about increased costs due to the healthcare law, increased taxes, and the like or are seeing some permanence in slowing activity. In addition, production rates appear to have borrowed from order backlogs again. The production index increased by 1.3 points to 53.7 while the backlog figures fell by 0.5 points to 41, the later suggesting a faster contraction in order backlogs versus last month. A contraction in backlogs tends to lead a fall in production rates, that is without any subsequent increase in new orders.
As for new orders, order rates increased at a slower pace in November versus October, as the new order index of 50.3 fell by nearly 4 full points month-over-month. However, new orders still increased. Looking ahead, I think new order rates will likely be dependent on the economy. Right now there is just too much noise in the customer inventories index to say with a high degree of confidence as to the path of future new orders. The current customer inventories index measure was 42.5, which according to my research suggests higher new order rates in future periods. However, this level follows a four period where customer inventory index levels of 49 or above suggest that channel inventories were too high. Taken as a whole, the last few months of customer inventory index levels probably suggests continued meandering of manufacturing activity.
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