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ISM Defies Double Dip

The ISM manufacturing report for the month of August is the first truly positive economic report we've seen in a long time, with nearly everything else pointing to the dreaded double-dip. In actuality, the index increase from 56.3 from 55.5 wasn't exactly a blowout number but it beat the consensus expectation for a decline to 53.0. In a nutshell, the report showed expansion in the manufacturing sector rather than an ongoing slowdown and that wasn't expected. It didn't take long for the media to begin asking if this dispels the double-dip potential.

 

In this market, we're glad to see any positive report and ride any ensuing optimism. The gains came largely on the back of a 2.9 point increase in production, a 1.8 point increase in employment, a 4.0 point gain in imports and a 1.2 point gain in inventories. Rising activity in the factories with added employees to handle the workload is a good sign of business coming back online; however, we would be doing ourselves a disservice if we didn't point out the negatives in the report. The new orders component slowed by 0.4 points, deliveries slowed by 1.7 points, backlog was down 3.0 points, and exports were down 1.0 points. The declines in new orders, deliveries and backlogs indicate a softening in end demand. Additionally, the components that slowed are more indicative of future activity. 

 

What's interesting is that the ISM contradicts some other reports that we have seen. In particular, other regional manufacturing reports including the Philly Fed survey, the Chicago PMI and the Dallas Fed survey; all indicated declining conditions in August. The ISM tends to correlate quite well with the other indexes, so one has to wonder where the discrepancy might be this month. Additionally, the ADP private employment report released the same day showed a 10,000 job decrease in August whereas the ISM employment component hit its highest level since December 1983.

  

All in all, the report is worth taking as a positive but it doesn't discount the double-dip. There was a litany of poor economic data this month from almost every sector of the economy (especially housing), including contradicting manufacturing reports. While we do not discount the ISM, we are weary of the slowing in many of its forward-looking components and mounting bad news elsewhere.



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