Falling Up

The Institute for Supply Management (ISM) reported that June was the eleventh consecutive month of growth in its manufacturing index.  However, the sequence of reports suggests that while production is still going up, the rate of change is falling. In other words April, May, and June showed manufacturing readings of 60.4, 59.7, and 56.2 respectively.  All three months were above the breakeven mark of 50, thereby showing growth, but the pace has been decelerating.  Within the report, new orders make up the largest part; they also continue to expand at a slower pace.  This is important because new orders turn into future fabrication.  Production fell up as well in June, going from 66.6 to 61.4.  The employment component also expanded, again at a slower rate.  Inventories bucked this trend and grew down.  This means they still fell in June but contracted at a slower pace than in May.  The ISM’s companion piece for June, their non-manufacturing index, showed a similar pattern, falling up to 53.8 from 55.4 in May, while delivering its lowest reading since February of this year, as did the business activity (at 58.1) component.  Again this still demonstrates growth is occurring, just at a slower pace.  Here new orders fell up to 54.4, the lowest reading year-to-date.  Two sectors in this report did reverse from growth to outright decline: employment hit 49.7 while exports came in at 48, showing weakness in two of the main drivers needed to generate any meaningful economic recovery.  We will continue to monitor the falling up-trend in the ISM reports going forward, especially the manufacturing component, which is very sensitive to the economic cycle.  With some of our other indicators showing signs economic fatigue may develop in the second half of 2010, we would not be shocked if more ISM figures begin to fall down in the months ahead.