Positive ISM Reading But Signs Of Channel Stuffing/Backlog Drawdown

The July Purchasing Managers' Index (PMI) released by the Institute of Supply Management was no doubt a positive reading, most especially in the new orders index. The July PMI came in at 55.4, a 4.5 point improvement versus the June period.

MANUFACTURING AT A GLANCE JULY 2013
Index	Series Index Jul	Series Index Jun	Percentage Point Change	Direction	Rate of Change	Trend* (Months)
PMI™	55.4	50.9	+4.5	Growing	Faster	2
New Orders	58.3	51.9	+6.4	Growing	Faster	2
Production	65.0	53.4	+11.6	Growing	Faster	2
Employment	54.4	48.7	+5.7	Growing	From Contracting	1
Supplier Deliveries	52.1	50.0	+2.1	Slowing	From Unchanged	1
Inventories	47.0	50.5	-3.5	Contracting	From Growing	1
Customers' Inventories	47.5	45.0	+2.5	Too Low	Slower	20
Prices	49.0	52.5	-3.5	Decreasing	From Increasing	1
Backlog of Orders	45.0	46.5	-1.5	Contracting	Faster	3
Exports	53.5	54.5	-1.0	Growing	Slower	8
Imports	57.5	56.0	+1.5	Growing	Faster	6
OVERALL ECONOMY				Growing	Faster	50
Manufacturing Sector				Growing	Faster	2

The gain in July came about by increases across four of the five inputs into the composite measure, with inventories falling 3.5 points. There is no doubt that the 6.4 point increase in the new order index is a positive, and likely alleviates some near-term uncertainties as to the pace of the decline in economic growth showing up in other data.

Production figures also surged. However, this is largely due to, in part, the gain in new orders. Additionally, production rates increased on the continued draw down in order backlogs. One last point concerning the latest PMI report, the customer inventories index gained 2.5 points in the month, a move towards the higher end of the historic range. This not only suggests a slowing in the pace of new orders in the months ahead, but also could suggest that some of the production gains in the month were due to channel stuffing. That aside, the July ISM is still a positive report.