ISM Suggests Flatlining Economy

The Institute of Supply Management (ISM) released their latest Purchasing Manager's Index earlier this morning, suggesting a slight resumption of growth in manufacturing occurred in June. The ISM's report reads, in part....

WHAT RESPONDENTS ARE SAYING ...

• "Business remains good to improving." (Miscellaneous Manufacturing)
• "Industry volumes picking up with improved housing starts." (Electrical Equipment, Appliances & Components)
• "Indications are that customers have acceptable inventory levels, and as a result, are backing down on new orders and reassessing market conditions." (Wood Products)
• "Last couple of weeks a little slower." (Furniture & Related Products)
• "Seeing signs of life through summer retail [sales] promotions — still an overall soft market." (Food, Beverage & Tobacco Products)
• "Business is steady. Qualified CNC machinists are hard to find." (Fabricated Metal Products)
• "Weather conditions are causing uncertainty in agricultural markets." (Machinery)
• "Continued slow improvements." (Transportation Equipment)
• "June sales appear to have rebounded from what was a lackluster May." (Paper Products)
• "Slow growth continues to choke the recovery. We are not out of the woods yet by any stretch of the imagination." (Chemical Products)

MANUFACTURING AT A GLANCE JUNE 2013
Index	Series Index Jun	Series Index May	Percentage Point Change	Direction	Rate of Change	Trend* (Months)
PMI™	50.9	49.0	+1.9	Growing	From Contracting	1
New Orders	51.9	48.8	+3.1	Growing	From Contracting	1
Production	53.4	48.6	+4.8	Growing	From Contracting	1
Employment	48.7	50.1	-1.4	Contracting	From Growing	1
Supplier Deliveries	50.0	48.7	+1.3	Unchanged	From Faster	1
Inventories	50.5	49.0	+1.5	Growing	From Contracting	1
Customers' Inventories	45.0	46.0	-1.0	Too Low	Faster	19
Prices	52.5	49.5	+3.0	Increasing	From Decreasing	1
Backlog of Orders	46.5	48.0	-1.5	Contracting	Faster	2
Exports	54.5	51.0	+3.5	Growing	Faster	7
Imports	56.0	54.5	+1.5	Growing	Faster	5
OVERALL ECONOMY				Growing	Faster	49
Manufacturing Sector				Growing	From Contracting	1

In my opinion, this report shows very little change from the May report and indicates manufacturing and the economy as a whole are flatlining.

The two standout survey responses, in my mind, are exhibited in the decline in employment and order backlogs. Addressing the later first, order backlogs is a leading indicator of production levels and changes in both new orders and backlogs can be used to gauge the current and potential future quality of production levels. The decline in current backlogs suggests that the increase in production was helped by the pass through of prior period orders- orders that are likely to have long lead times.

Although production was helped by a boost in orders, the customer inventories index is suggesting that future order rates are likely to go either way. More importantly, take the above dynamic in regards to the decline in employment levels. Manufacturers will usually retain employees, many of them skilled, until it is evident that business conditions are clearly slowing and will continue to do so. Looking at the survey results since the late 1950's, a employment demarcation below 50 has indicated a median decline in the new orders survey by 1.25 points six month hence.

Although the survey results are positive in the month, a forward-looking analysis suggests that the risks remain.