July 2011 ISM Manufacturing Survey Sends Recession Warning

Econintersect does not respect surveys.  They do not end up being consistent against hard economic data, and usually miss economic turning points.  Last month, the ISM Manufacturing survey said conditions were improving.  In July 2011, the ISM survey has turned south and is sitting at 50.9 (50 separates economic contraction and expansion).

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.”

Of the 18 manufacturing industries, 10 are reporting growth in July, in the following order: Paper Products; Furniture & Related Products; Computer & Electronic Products; Transportation Equipment; Wood Products; Petroleum & Coal Products; Printing & Related Support Activities; Primary Metals; Fabricated Metal Products; and Nonmetallic Mineral Products. The seven industries reporting contraction in July — listed in order — are: Apparel, Leather & Allied Products; Plastics & Rubber Products; Textile Mills; Electrical Equipment, Appliances & Components; Food, Beverage & Tobacco Products; Machinery; and Chemical Products.

There are a lot of meaningless survey information (economically speaking) in the ISM survey.  However, new orders and backlog of orders have direct economic consequences – IF the opinions are accurate.  Contracting new orders cannot be a good sign – and based on past recessions has been an indicator a recession was starting.

Backlog is a poor indicator of an impending recession – but is used an indicator that an expansion is underway.  We can definitely say this survey is not telling us we are in a period of strong growth.

Econintersect can definitely say that the ISM Manufacturing survey will not be used by economic bulls as an indicator good times are coming.

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