Manufacturing ISM Highest Since June; Expiring Business Tax Credits Explain Why; Enjoy it While You Can As US Decoupling Won't Last

The Institute for Supply Management released the December 2011 Manufacturing ISM Report On Business®

"The PMI registered 53.9 percent, an increase of 1.2 percentage points from November's reading of 52.7 percent, indicating expansion in the manufacturing sector for the 29th consecutive month. The New Orders Index increased 0.9 percentage point from November to 57.6 percent, reflecting the third consecutive month of growth after three months of contraction. Prices of raw materials continued to decrease for the third consecutive month, with the Prices Index registering 47.5 percent, which is 2.5 percentage points higher than the November reading of 45 percent. Manufacturing is finishing out the year on a positive note, with new orders, production and employment all growing in December at faster rates than in November, and with an optimistic view toward the beginning of 2012 as reflected by the panel in this month's survey."

MANUFACTURING AT A GLANCE DECEMBER 2011
Index	Series Index Sep	Series Index Aug	%age Point Change	Direction	Rate of Change	Trend* (Months)
PMI	53.9	52.7	+1.2	Growing	Faster	29
New Orders	57.6	56.7	+0.9	Growing	Faster	3
Production	59.9	56.6	+3.3	Growing	Faster	4
Employment	55.1	51.8	+3.3	Growing	Faster	27
Supplier Deliveries	49.9	49.9	+0.0	Growing	Same	2
Inventories	47.1	48.3	-1.2	Contracting	Faster	3
Customers' Inventories	42.5	50.0	-7.5	Too Low	From Unchanged	1
Prices	47.5	45.0	+2.5	Decreasing	Slower	3
Backlog of Orders	48.0	45.0	+3.0	Contracting	Slower	7
Exports	53.0	52.0	+1.0	Growing	Faster	2
Imports	54.0	49.0	+5.0	Growing	From Contracting	1
OVERALL ECONOMY				Growing	Faster	31
Manufacturing Sector				Growing	Faster	29

Expiring Business Tax Credits Partially Responsible

Looking for an explanation for the rise in December? I have one (and was aware of a likely jump in PMI in advance): 2011 Expiring Business Tax Incentives

Expiring Business Tax Incentives

1. 100% Bonus Depreciation – The bonus depreciation deduction for qualifying property placed into service after September 8, 2010 and through 2011 was increased to 100%. Once the incentive expires the depreciation rate reverts back to 50% bonus depreciation.
   
2. Self-Employment Tax Reduction – In 2011, the self-employment tax was reduced on a temporary basis. Individuals who are self-employed only need to pay a Social Security tax of 10.4% (reduced from 12.4%) and 2.9% Medicare tax on qualifying income. Self-employed individuals can also take a deduction for the 6.2% employer’s share of Social Security with a 1.4% employer’s share of Medicare as an above-the-line deduction.
   
3. Section 179d Depreciation Provisions - The increase in expensing limits under Section 179d for 2011 at $500,000/$2,000,000 (equipment/property) will be phased out at the end of 2011. In 2012, the rates will reduce to $125,000/$500,000 (equipment/property) until December 31, 2012..
   
4. 15 Year Straight Line Depreciation – This allows property owners and lessees to depreciate qualifying improvements to commercial office spaces, as well as restaurant leasehold improvements and new restaurant development.
   
5. Enhanced Charitable Deductions. This tax credit allows C-Corporations the opportunity to claim an enhanced charitable deduction for qualified computer contributions, book inventories to school and food contributions to food depositories.
   
6. Employer Wage Credit for Active Military Reservists – This tax credit provides eligible small businesses (companies with 50 or fewer employees) with a credit against the company’s income tax liability for a taxable year in an amount equal to 20% of the sum of the wage payments made to activated military reservists..
   
7. New Markets Tax Credit – This tax credit offers a 39% credit on an equity investment to a Community Development Entity (CDE) that is claimed over a 7 year compliance period. The CDE must then make a Qualified Equity Investment or loan to a Qualified Business in a Qualified Low Income Community (LICs). Most commercial and mixed-use real estate development located in LICs are considered Qualified Businesses. The credit is designed to encourage investment in LICs that traditionally have limited access to debt and other sources of investment income.
   
8. Credit for Construction of New Energy Efficient Homes - This tax credit provides an eligible contractor which constructs a qualified new energy efficient home a credit of up to $2,000 per home. The credit is available for all new homes, including manufactured homes constructed in accordance with the Federal Manufactured Homes Construction and Safety Standards.
   
9. Energy Efficient Appliance Credit. This tax credit is available to companies that manufacture or produce qualifying models of refrigerators, dishwashers and washers/dryers. The credit is available for models produced in 2008, 2009, and 2010. The amount of the credit is dependent on the efficiency of the model and date the appliance was manufactured.
   
10. Alternative Fuel Vehicle Refueling Property Credit. This tax credit provides a 30% credit of the cost of any alternative fuel vehicle refueling property placed into service in 2011 (not including hydrogen stations). The credit is limited to $30,000 per location for commercial clean fuel property, and $1,000 per location for residential clean fuel property.
    

Some of the above incentives are minor but others likely had a major impact.

Think manufactures did not bring massive amounts of production forward to take advantage of these expiring credits?

Enjoy it While You Can As US Decoupling Won't Last

Manufacturers are producing at an unsustainable rate. The global economy is rapidly cooling led by Europe, Asia, and Australia. That is a lot of downside leadership.

Please note that Eurozone Manufacturing Contracts 5th Straight Month; New Orders Fall Faster than Output

The US will not decouple this year as noted in Major Slowdown in Global Trade Coming Up; Think the U.S., China, Germany, or U.K. will Be Immune?

Expiring tax incentives provided a nice, but unsustainable pop in manufacturing. Notice how prices and backlog of orders did not follow.

Regardless of how much tax credits affected the ISM numbers, the global slowdown will take a toll on US manufacturing.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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