Last evening with futures surging on reports of a fluff debt ceiling agreement, I said “After spending a day in the garden weeding and transplanting I arrive at my computer to see S&P; futures up 20 points, 1.5% on news a compromise was reached. Quite frankly this is ludicrous given that anyone not brain dead knew a deal would be reached.

It would be fitting if this futures ramp was the mother of all gap-and-craps. This deal solves nothing.

Indeed it was an enormous gap-and-crap, and fittingly so, on incredibly weak manufacturing ISM data. S&P; futures that were up 20 points last evening are now down 10.

Economists who in aggregate cannot see a recession coming until it is half over, once again missed data that says things are slowing considerably, nearly everywhere.

Thus I am not surprised that economists are surprised by today’s shockingly “unexpected” ISM report.

ISM Drops to 50.9, Lowest Level in Two Years

Bloomberg reports U.S. ISM Manufacturing Index Drops More Than Estimated to 50.9 From 55.3

U.S. manufacturing expanded in July at the slowest pace in two years as new orders shrank and production eased.

The Institute for Supply Management’s factory index fell to 50.9 last month from 55.3 in June, the Tempe, Arizona-based group said today. Economists projected the index would drop to 54.5, according to the median forecast in a Bloomberg News survey. Figures greater than 50 signal expansion.

Manufacturers are facing stagnant consumer spending, raising the risk that production will be tempered further even as parts shortages from Japan’s earthquake dissipate and commodity costs ease.

Growth cooled in eight of the Federal Reserve’s 12 regions, the central bank said last week in its Beige Book survey. Many regions said manufacturing slowed or held steady, according to the report, which covers June and the first half of July. Business activity in the U.S. expanded at a slower pace in July, the Institute for Supply Management-Chicago Inc. said July 29.

Fed policy makers, including Chairman Ben S. Bernanke anticipate the economy will strengthen in the second half of 2011 as “factors that are likely to be temporary” subside.

Dow Chemical Co. (DOW) Chief Executive Officer Andrew Liveris said his company sees “growth continuing to gain traction in developed markets, albeit at a somewhat uneven and jagged pace given persistently high unemployment in the U.S. and sovereign debt concerns in Europe.”

Temporary BullSweet

What the heck is with this temporary bullsweet, spreading the globe like a virus?

Europe is a basket case on austerity measures, China is still overheating and will slow, the US looks more recessionary every day, yet the Fed and US companies expect to see “traction” in the second-half.

Somehow the US is supposed to be immune to “global cooling” even though the US is cooling too.

New Orders Contract, Price Index Plunges

Inquiring minds are reading the July 2011 Manufacturing ISM Report On Business® for further economic clues.

The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. “The PMI registered 50.9 percent, a decrease of 4.4 percentage points, indicating expansion in the manufacturing sector for the 24th consecutive month, although at a slower rate of growth than in June. Production and employment also showed continued growth in July, but at slower rates than in June. The New Orders Index registered 49.2 percent, indicating contraction for the first time since June of 2009, when it registered 48.9 percent. The rate of increase in prices slowed for the third consecutive month, dropping 9 percentage points in July to 59 percent. In the last three months combined, the Prices Index has declined by 26.5 percentage points, dropping from 85.5 percent in April to 59 percent in July. Despite relief in pricing, however, several comments suggest a slowdown in domestic demand in the short term, while export orders continue to remain strong.”

Once again, in spite of plunging prices, and contraction in new orders, several commenting thought the slowdown was “short term”.

Manufacturing ISM at a Glance

Last month I reported Manufacturing ISM Weaker Than it Looks; Digging Into the Numbers; Inventory Restocking Accounts for Much of the Rise

For all the excitement over the 1.8 point rise, much of it is restocking inventories in the wake of the tsunami. The effect of inventories is 5.4 divide by five, or 1.08 (1.1) of the overall 1.8 rise.

The tsunami effect ended last month and if you failed to catch it then, it should be unmistakable now. Inventories are contracting and supplier inventories are slowing to the point of contraction.

Customers inventories do not affect the score.

Key Thoughts

Employment and production are the two categories that kept the ISM positive.

Don’t expect that to last with new orders and backlog of new orders in contraction, the latter for the second consecutive month.

Reaction in Gold

Gold which had fallen to $1607 is now slightly up for the day. On the inept action by Congress, it ought to be soaring. However, nothing moves in a straight line.

Mike “Mish” Shedlock
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