ISM Manufacturing Index Hits Bottom

Last month I noted that the ISM Manufacturing index indicated that the manufacturing sector was still contracting, albeit at a slower pace. The latest data from the month of April show the same phenomenon. Likely, the index has already hit bottom.

Here’s what the Institute for Supply Management says in its release:

WHAT RESPONDENTS ARE SAYING ...

• "International customers are having trouble getting cash for new orders, even though they need/want the equipment." (Computer & Electronic Products)
• "Starting to see some signs of increased production and demand from some automotive customers." (Fabricated Metal Products)
• "Business conditions continue to be soft, but agriculture-related products are still quite bullish." (Machinery)
• "We are optimistic that things will change for the better in 3Q." (Chemical Products)
• "Starting to hear of slight upticks in orders from some sectors of our business but not all." (Electrical Equipment, Appliances & Components)

The chart below, also in the release, should give you a feel for how broad-based the improvement in the sector is. Note the purging of customer inventories. It might even suggest that the purge has gone too far. That is extremely bullish for Q3 GDP, if not Q2.

Now compare this to a chart from December when things were the worst.

My conclusion is that we have hit bottom in manufacturing. Apparently, Goldman's Jim O'Neill is right.

Source: Manufacturing ISM Report On Business® - ISM

Comments

[UbuTranscen...:]

Edward,

You write: "Last month ... the manufacturing sector was still contracting, albeit at a slower pace" and "The latest data from the month of April show the same phenomenon."

Then you write: "Likely, the index has already hit bottom."

I don't really understand what you mean. If we are still declining, albeit more slowly, then how can we have already hit bottom?

Would I be correct in rephrasing your statement as: we should hit bottom sometime soon, if the rate of decline continues to slow?

Please let me know what you meant. Thanks, Ubu.

May 03 04:20 AM

[CautiousInv...:]

Economic commentary abounds with suggestions that the paring of inventory hints at rebuilding of stocks but nobody is receiving orders yet.

Without disrespect to the author, I would suggest this is more data to be filed under the second derivative argument which is constructed around the notion that things are still deteriorating, though more slowly.

May 03 08:17 AM

[Carlos Lam:]

The BEA reported that the goods-producing sector (i.e. mining, forestry) cut payrolls AGAIN in March. Less raw materials coming off & out of the land = less manufacturing. Manufacturing won't resume growth until we see raw materials producers consistently increase payrolls.

May 03 08:20 AM

[Edward Harr...:]

That's a good question because many people don't understand that many of the statistics we care about are actually first derivative stats. That means they measure the change in something. For example, the 50 measure in the ISM index measures whether the manufacturing sector is expanding or contracting. The lower the number, the more quickly the sector is contracting. What I am saying is that the sector looks to have reached its maximum point of contraction. It is contracting, but at a slower pace.

By the way, this is also true for employment as measured by jobless claims.

What does that mean? It means that the maximum point of contraction was probably Q4 2008 and that the economy is improving, albeit still contracting.

The question is whether this means we will get out of recession soon. It is still unclear at present, but by mid-summer, if the trend holds, it is likely that we will see positive GDP growth by Q4 or Q1 2010.

As for the inventories purge, you should note again that it is a first derivative effect - meaning the GDP statistic is NOT a stock measurement, but a flow measurement, it measures the change in GDP from one qtr to the next on an annualized basis. That necessarily means that even if inventories are being purged but at a less severe rate, it is going to have a positive impact on GDP. We don't need to see re-stocking to get a positive effect from inventories by Q4. All we need to see is inventories being purged at a less severe rate.


On May 03 04:20 AM UbuTranscendent wrote:

Edward,

You write: "Last month ... the manufacturing sector was still contracting, albeit at a slower pace" and "The latest data from the month of April show the same phenomenon."

Then you write: "Likely, the index has already hit bottom."

I don't really understand what you mean. If we are still declining, albeit more slowly, then how can we have already hit bottom?

Would I be correct in rephrasing your statement as: we should hit bottom sometime soon, if the rate of decline continues to slow?

Please let me know what you meant. Thanks, Ubu.

May 03 09:17 AM

[Did U Think...:]

How about a bit of sanity to go with the numbers. China is bailing on the USD and they are buying whatever they can in order to diversify out of it since they know we plan to inflate away our debt to them. All confidence in US leaders is gone, they are exposed as a bunch of scammers.

China drove the price of copper to the moon and other commodities are being propped up by them as well. given that they are such a small % of the world's GDP, China's money will run out soon enough and then there will be absolutely nothing to prop the global economy up. The next wave down will be truly breathtaking. This is the calm before the storm, not signs of the bottom. The eye of the hurricane is not a nice place to be.

May 03 06:27 PM

[Fred Voetsch:]

Good data but let's be careful about how we interpret that data.

We never know we have hit bottom until we either hit zero or we are far in the future and can look back with certainty

In the spring of 1930 many thought that the crash of 1929 was all there was to the stock market crash as the market was back up by 50% yet much more decline was to come.

I would like to add this data for those who think that earnings are doing well:

www2.standardandpoors....

"341 issues (76.15% mkt val) rptd: initial good reports fading, actuals are 2% behind of estimates, and -36.1% behind last year...

Sales down 12.8 with 89 beating last year and 246 falling short

As Rpt EPS for 12 Mo Sep,'09 estimated to be negative ($-1.83 EPS) - first time in index history"


That is directly from Standard & Poors. According to them the current P/E ratio for the S&P 500 is 58. According to them it is getting worse and will go negative later this year. Now ask yourself why Bloomberg and The Wall Street Journal are reporting it as 13?

Folks, you are being lied to by the media, your government, and just about everyone else out there while they get all of their money stashed away in a safe place or in the hopes that they can simply lie their way out of this mess.

Good luck to you all but I would suggest relying on the truth and not on what the media and government are telling you.

May 03 09:51 PM

[SeekingTruth:]

To Fred Voetch:
Thanks for the reality check on reported S&P PE's vs. "media" PE's.
How does the media get away with this? This is a legitimate question-- there must be something that they are hanging their hat's on to come up with their much rosier numbers even though they are misleading.
Any further insight on this will be much appreciated.

May 03 10:38 PM