Excited About Today's ISM- Don't

The Institute of  Supply Management (ISM) released January Purchasing Managers Index (PMI) earlier today, showing that the growth in manufacturing continued in January. The January PMI was 53.1, better than the 50.2 in December on a increase in the the five index inputs.

MANUFACTURING AT A GLANCE JANUARY 2013
Index	Series Index Jan	Series Index Dec	Percentage Point Change	Direction	Rate of Change	Trend* (Months)
PMI™	53.1	50.2	+2.9	Growing	Faster	2
New Orders	53.3	49.7	+3.6	Growing	From Contracting	1
Production	53.6	52.6	+1.0	Growing	Faster	5
Employment	54.0	51.9	+2.1	Growing	Faster	40
Supplier Deliveries	53.6	53.7	-0.1	Slowing	Slower	3
Inventories	51.0	43.0	+8.0	Growing	From Contracting	1
Customers' Inventories	48.5	47.0	+1.5	Too Low	Slower	14
Prices	56.5	55.5	+1.0	Increasing	Faster	6
Backlog of Orders	47.5	48.5	-1.0	Contracting	Faster	10
Exports	50.5	51.5	-1.0	Growing	Slower	2
Imports	50.0	51.5	-1.5	Unchanged	From Growing	1

This is all well and good and is likely contributing to the equity market's gains, but I would not expect the strength (or at the very least the accelerating trend) to last, as the forward looking metrics are suggesting underlying future weakness. For one, the customer inventories index (which typically moves inverse to new orders) is 3 points more than average. High customer inventory index readings tend to suggest lower new orders in future periods. Additionally, the inventory index, which measures inventory levels at manufacturers, moved from contracting in December to a gain in January with a reading of 51 in the most recent period. Since 1990, the inventory index has averaged 45, indicating the pairing of inventories. More so, an inventory index greater than 50 has foreshadowed a decline of about 2 to 3 points in PMI over the next 3 to 6 months. Also of note is that the backlog of orders contracted once again, registering a 47.5. The order backlog, in conjunction with new orders, flows into production rates, and a contracting backlog in not constructive for future production rates.

Last item to note are the comments from survey respondents, most of which sounded a caution tone.

• "Fiscal cliff, uncertainty in general and EU economic weakness are factors causing our customers to be very tentative with commitments for product purchases in 2013." (Machinery)
• "Midwest drought impact will be felt at least through midyear, impacting protein, sweeteners, eggs, oils, emulsifiers, etc." (Food, Beverage & Tobacco Products)
• "Slowing interest in high-dollar purchases reflects continuing economic uncertainty." (Miscellaneous Manufacturing)
• "Expenditure and investment are expected to remain high in North America in Q1 and Q2, 2013." (Petroleum & Coal Products)
• "Housing sales are trending upward in light of overall market uncertainty, translating to improving optimism in appliance market." (Electrical Equipment, Appliances & Components)
• "Still waiting for reaction to consumer tax increases." (Fabricated Metal Products)
• "Government spending is very low, probably due to the fiscal cliff and the looming debt ceiling." (Transportation Equipment)
• "Business is improving." (Furniture & Related Products)
• "The general theme developing in our industry is that we can move suitable volumes. However, profit margin is elusive." (Wood Products)
• "Overall production volume decreasing. Decrease is led by decline in exports of 10 percent." (Chemical Products)