PMI Declines May Be Signal of Deeper Recession

 |  Includes: AKS, CF, MOS, POT
by: The Mays Report

By G C Mays

The Institute for Supply Management's manufacturing purchasing manager index (PMI) registered 50.9, a decline of 4.4 percentage points. The largest declines were in prices, employment and supplier deliveries. On January 5, 2011 I wrote a piece, titled "ISM Manufacturing Index Ends Year Higher - Has It Peaked?" It looks like I was about a month off as the index peaked in February with the PMI registering at 61.4. The PMI has since declined in four of the last five months. The ISM Manufacturing PMI is a leading economic indicator and we are beginning to see ourselves being lead back into recession.

The prices index declined by a full 9.0 percentage points to 59.0 confirming the price moderation indicated by the July report on consumer and producer price indexes issued by the Bureau of Labor Statistics. The ISM survey indicated that prices are still increasing but at a slower rate.

Employment is also growing more slowly with the employment index for July registering at 53.5, 6.4 percentage points lower than June. Supplier delivery times are also picking up, although still slow as indicated by the 50.4 registered by the supplier deliveries index.

New orders, inventories and order backlogs actually began to contract in July. The new orders July index reading of 49.2 is consistent with a decline in the Census Bureau's series on manufacturing orders. The Census bureau's advance report on June Manufacturing orders showed a 2.05 percent fall in durable goods orders. When the full report is released on August 3rd at 10:00 AM we will have a more complete picture.

The ISM inventories index registered a 49.3 for the month of July, a decline of 4.8 percentage points. Generally, the inventories index should drop below 42.7 before being consistent with contraction and the Bureau of Economic Analysis figures on overall manufacturing inventories. We'll have to wait and see. The order backlogs index fell by 4.0 percentage points to 45.0. This is consistent with the decline in inventories and new orders and represents an overall decline in aggregate demand.

Reported prices for corn, wheat and soybean oil were lower during the month of July according to survey respondents. Over the coming quarters this could impact a company like CF Industries(NYSE:CF), whose fortunes are strongly tied to corn. Mosaic (NYSE:MOS) and Potash (NYSE:POT), whose stocks are more closely related to wheat and soybeans may also be affected if the price declines persist. Reported prices for steel was both higher and lower during July. This combined with the huge earnings miss may explain the volatile moment of AK Steel (NYSE:AKS) over the last month. With its current price below $12 per share AK Steel is a better value. However I would hold off on getting long until the dust settles.

Germany, Great Britain and the European Union also released their Purchasing Manager Index (PMI) figures and showed declines of 2.6%, 2.3%, and 1.6%, respectively. Switzerland reported this morning. While the domestic PMI numbers may only give a short-term shock to a stock market which is no longer strongly tied to its countries economic fortunes, global weakness will cause a strong and sustainable correction.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.