Manufacturing ISM Dips Slightly, Barely Above Contraction, Saved by Inventory Growth, Much Weaker than it Looks

The August 2011 Manufacturing ISM Report On Business® is barely above contraction, buoyed only by rising inventories.

"The PMI registered 50.6 percent, a decrease of 0.3 percentage point from July, indicating expansion in the manufacturing sector for the 25th consecutive month, at a slightly slower rate. The Production Index registered 48.6 percent, indicating contraction for the first time since May of 2009, when it registered 45 percent. The New Orders and Backlog of Orders Indexes edged up slightly from July, but both indexes are indicating contraction in August at slower rates than in July. The rate of increase in prices slowed for the fourth consecutive month, dropping another 3.5 percentage points in August to 55.5 percent. The overall sentiment is one of concern and caution over the domestic and international economic environment, which is affecting customers' confidence and willingness to place orders, at least in the short term."

Manufacturing PMI Components

MANUFACTURING AT A GLANCE AUGUST 2011
Index	Series Index Aug	Series Index Jul	% Point Change	Direction	Rate of Change	Trend* (Months)
PMI	50.6	50.9	-0.3	Growing	Slower	25
New Orders	49.6	49.2	+0.4	Contracting	Slower	2
Production	48.6	52.3	-3.7	Contracting	From Growing	1
Employment	51.8	53.5	-1.7	Growing	Slower	23
Supplier Deliveries	50.6	50.4	+0.2	Slowing	Faster	27
Inventories	52.3	49.3	+3.0	Growing	From Contracting	1
Customers' Inventories	46.5	44.0	+2.5	Too Low	Slower	29
Prices	55.5	59.0	-3.5	Increasing	Slower	26
Backlog of Orders	46.0	45.0	+1.0	Contracting	Slower	3
Exports	50.5	54.0	-3.5	Growing	Slower	26
Imports	55.5	53.5	+2.0	Growing	Faster	24
OVERALL ECONOMY				Growing	Slower	27
Manufacturing Sector				Growing	Slower	25

Employment

ISM's Employment Index registered 51.8 percent in August, which is 1.7 percentage points lower than the 53.5 percent reported in July. While this month represents the 23rd consecutive month of growth in manufacturing employment, the August reading is also the lowest reading since November 2009, when the index registered 50.4 percent. An Employment Index above 50.1 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.

See report for details on other sub-components.

Saved by Inventory Growth

The headline number is an average of new orders, production, employment, supplier deliveries, and inventories.

Rounding to the nearest decimal, that average is 5.6%, helped by rising inventories.

This month both new orders and production are in contraction. Backlog of orders is also contracting. Exports are barely above contraction.

The key trends are all lower. This could easily be the last hurrah after 25 months of manufacturing expansion.

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