The May 2010 Manufacturing ISM Report On Business was released today. The report was strong, making 6 bullish months in a row. The ISM PMI (Purchasing Managers’ Index) came in at 59.7, down from 60.4. The Bloomberg consensus range was 57.5 to 61.3, so this was well received. Anything greater than 50 indicates expansion. I have one concern, which is that we’ve stopped accelerating in manufacturing, but our last GDP revision took our consumer spending portion of growth down 17% from the previous growth estimate. Sure, this amounted to a fraction of a percentage point, but we’re still talking about a substantial overestimation of the consumer rebound in raw dollar amounts. Consider this: Europe has a bigger influence on our economy than our own manufacturing base. If the ISM drops again next month, I reserve the right to revise this call as a non-bullish inflection point.

As usual, the notes on employment and inventories are of primary interest to me. First, employment:

ISM’s Employment Index registered 59.8 percent in May, which is 1.3 percentage points higher than the 58.5 percent reported in April. This is the sixth consecutive month of growth in manufacturing employment. 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.

Twelve of the 18 manufacturing industries reported growth in employment in May…

This is great news.

Inventories were a boost to Q4 GDP, but had tapered off by the end of Q1. Manufacturers’ inventories:

Manufacturers’ inventories contracted in May for the second consecutive month as the Inventories Index registered 45.6 percent. The index is 3.8 percentage points lower than the April reading of 49.4 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).

The trend may be down. This happened too quickly from too low a base to celebrate. We had a v-shaped recovery, but it was lower case. Customers’ inventories:

The ISM Customers’ Inventories Index registered 32 percent in May, 1 percentage point lower than in April when the index registered 33 percent, and the 14th 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.

Ok, unless we start experiencing some terrible declines soon, I’m going to write off Customers’ Inventories as a useful metric (shorter posts? Could happen). Maybe everyone does have Wal-Mart-quality inventory control. If we do experience terrible declines in our manufacturing sector, great indicator.

Better employment numbers, weaker inventory numbers. The price indicator is ridiculously high (77.5, down from 78, but the 11th month above 50). Oddly, the commodity prices were mostly up. Only Aluminum prices were uniquely reported as down. Given the rough market for commodities in May, I’m guessing the next report will be different.

This report really was stronger than you might expect from the sections I’ve highlighted. Sixteen of eighteen manufacturing sectors reported growth (petroleum and coal were the losers). The employment index is a good coincident indicator. Unfortunately, it is a lousy leading indicator at this stage in the cycle. Layoffs can happen quickly. Hopefully next month’s report comes in strong, and all my concerns can be dismissed.