While the newest ISM reports did not indicate the start of a double-dip recession, both reports were weaker than expected. The Manufacturing ISM Report announced a drop of 0.8 to 50.8% which was below the consensus estimates of 52 and a range of 50.9 to 53% (Econoday Report: ISM Mfg Index). The Non-Manufacturing ISM Report announced an insignificant drop of .1 to 52.9% so that it fell into the consensus range of 52.2 to 54% but was below the consensus point 53.5% that signified that economists were expecting the index to raise 0.6% (Econoday Report: ISM Non-Mfg Index).
Even though the recent reports have shown continued weak and anemic economic growth, there was some surprise in the underlying indexes that could indicate positive news going forward. It was expected that the price pressures would continue to subside, indicated by the number of commodities up in price declining along with the price indexes. In fact, the manufacturing report showed more commodities with prices down than up for both multi-month commodities and total commodities. Multi-month commodities up in price was 3 and 6 for commodities down in price, and the numbers for total commodities are 5 and 12 respectively. Thus the price indexes also dropped, for example the significant drop of the non-manufacturing index by 4.8 to 57.1%. Even more surprising was the manufacturing price index dropped an amazing 15 points to 41%. Also the net percent of respondents stating that prices were lower minus those responding higher changed from a positive 12 to a negative 18. This is even more significant drop since it plunged below the break even point of 50 (more precisely 49.4%). The report noted the significance of these events below along with the graphs (click to enlarge) for commodities with rising prices for manufacturing and non-manufacturing.
This is the sixth consecutive month the prices index has registered below 80 percent since December 2010, and is the first month of contraction since May 2009 when the index registered 43.5 percent. The last time the Prices Index decreased more than 15 percentage points was in June 2010, when it registered 57 percent compared to the prior month's reading of 77.5 percent.
Picking up steam or grasping at straws?
One bit of good news was that the manufacturing index for new orders reversed from negative territory to expansion after 3 months of contraction. The index rose by 2.8 to 52.4%. This may be a positive sign going forward but it seems too little and too late to be an important factor in the recovery. On the other hand, new orders dropped 4.1 to 52.4 for the non-manufacturing index.
The biggest surprise from the reports was the non-manufacturing employment index reversed its short term declining trend below the break-even point of 50, and the index jumped a decent 4.6 points to 53.3%. I certainly expected it to stay under 50 even if it was expected to increase over last month's low of 48.7%. Below is a graph showing the non-manufacturing index since December 2009.
Even with the few positive signs, the problems the US economy faces are much larger than a one-month expansion in new orders or reversal of short-term employment trends. The biggest problem is arguably unemployment staying stuck in the 9% range. And only heaven knows how the euro crisis will be resolved. Greece may be small potatoes for the world economy, but if the financial problems topple over other unstable governments and financial institutions, then it will be hard to predict how far the contagion will grow.