This is the third strong (February 2010) Manufacturing ISM Report On Business in as many months. The ISM PMI (Purchasing Managers’ Index) came in at 56.5, down from 58.4 (unrevised) last month. This came in near the low end of the Bloomberg consensus range of 55.0 to 60.0. Elsewhere, this was reported as missing expectations. Meh. As usual, the notes on employment and inventories are of primary interest to me. First, employment:

ISM’s Employment Index registered 56.1 percent in February, which is 2.8 percentage points higher than the seasonally adjusted 53.3 percent reported in January. This is the third month of growth in manufacturing employment, and the highest reading since January 2005 (58.7 percent). An Employment Index above 49.8 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.

Ten of the 18 manufacturing industries reported growth in employment in February…

Unfortunately, while manufacturing hiring was strong, it won’t be enough to give us jobs growth for the month of February (manufacturing isn’t a big enough source of jobs overall). This is still good news, though. In fact, it’s better than the good news from last month.

We continue to look at the inventory data for confirmation of inventory expansion. We score a partial victory this month.

Manufacturers’ Inventories:

Manufacturers’ inventories contracted at a slower rate in February as the Inventories Index registered 47.3 percent. The index is 0.8 percentage point higher than the seasonally adjusted January reading of 46.5 percent. An Inventories Index greater than 42.6 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis’ (BEA) figures on overall manufacturing inventories (in chained 2000 dollars).

Customers’ Inventories:

The ISM Customers’ Inventories Index registered 37 percent in February, 5 percentage points higher than in January when the index registered 32 percent, and the 11th consecutive month the Customers’ Inventories Index has been below 50 percent. The index indicates that respondents believe their customers’ inventories are too low at this time.

The only industry reporting higher customers’ inventories during February is Furniture & Related Products.

Well, at least Manufacturers’ Inventories are consistent with last quarter’s GDP report. The previous ISM reports were not for either inventory measure. I was troubled by this, and went to the BEA’s Methodology Site. The story told by the ISM inventory data is likely to be more accurate. However, the actual GDP number is unlikely to be significantly revised. Errors tend to cancel out for various reasons (though there may be quarterly fluctuations). I’m still expecting a downward revision to the GDP data at some point (it was revised up in the last revision, but some of the data comes in at 5 year intervals, not every 3 months). I must admit that the historical evidence doesn’t support this position, though. Overall, I think this inventory data still qualifies as less bad.

The overall ISM report is quite bullish. The inventory data is no longer terrible, and the employment data continues to improve from already good numbers.