This morning, the July 2016 Manufacturing ISM® Report On Business® showed a slight decline in growth from 53.2 to 52.6, a decrease of 0.6 percentage point.

Bloomberg Econoday nearly went gaga over the report.

Highlights

Employment fell slightly and delays in delivery times eased, two factors that held down the July ISM index to 52.6 vs June’s 53.2. But that’s not the important news. The important news is the new orders index which remains extremely solid, at 56.9 and pointing to future strength for employment as well perhaps as slowing for future deliveries (slowing in deliveries is an indication of strength in demand, of congestion in the supply chain).

Export orders are not as strong as domestic orders but they are respectable, at 52.5 which is safely above breakeven 50 to indicate monthly growth. The reading here echoes even stronger export results the manufacturing PMI which was released earlier this morning.

Production is solid in this report, at 55.4 for a 7 tenths gain in the month. Inventories are flat and prices for inputs are showing modest pressure.

But it’s the new orders index that is the standout in this report and which hints at badly needed improvement in government data where new orders have yet to show strength. If the ISM orders pan out, the economy looks to get a second-half lift from its lagging sector, the factory sector.

Recent History

The ISM manufacturing index is expected to hold steady at a moderate but constructive 53.2 in July, unchanged from June which was the best reading since February last year. New orders were an outstanding highlight of the June report, at 57.0 and pointing to strength in production and employment for ISM’s July report.

Same Old Second Half Recovery Song(From Bloomberg)

If the ISM orders pan out, the economy looks to get a second-half lift from its lagging sector, the factory sector.

  • Last Month: “New orders were an outstanding highlight of the June report, at 57.0 and pointing to strength in production and employment for ISM’s July report.”
  • This Month: “The important news is the new orders index which remains extremely solid, at 56.9 and pointing to future strength for employment.”
  • Actual Result: Employment contracted (as opposed to rising at a slower rate).

Same Old Song

ISM Manufacturing Numbers

July Manufacturing ISM
Index Jul June PP Change Direction Rate of Change Trend in Months
PMI® 52.6 53.2 -0.6 Growing Slower 5
New Orders 56.9 57.0 -0.1 Growing Slower 7
Production 55.4 54.7 0.7 growing Faster 7
Employment 49.4 50.4 -1.0 Contracting From Growing 1
Supplier Deliveries 51.8 55.4 -3.6 Slowing Slower 3
Inventories 49.5 48.5 1.0 Contracting Slower 13
Customers’ Inventories 51.0 51.0 0.0 Too High Same 2
Prices 55.0 60.5 -5.5 Increasing Slower 5
Backlog of Orders 48.0 52.5 -4.5 Contracting From Growing 1
New Export Orders 52.5 53.5 -1.0 Growing Slower 5
Imports 52.0 52.0 0.0 Growing Same 2

What Happened?

New orders have been increasing for 7 months. But employment actually contracted.

Why? The first clue is the backlog of work contracted.

This is likely an indication that although new orders are rising, they are rising at a very weak rate. Also note that that the rate of increase in prices just took a plunge as did supplier deliveries.

Finally, recall the ISM is a diffusion index. A small rise at one company will offset a deeper decline at another (or vice versa).

At best, Bloomberg is reading far too much into some very conflicting numbers.

Mike “Mish” Shedlock