All ahead full on QE2! … erm… QE2!

Also note that a weak dollar / strong yuan could hurt Apple profit margins on iPhones, iPads, and iPods. Apple is about 20% of the Nasdaq 100 (for comparison, Microsoft is less than 5%). One company could make a huge difference in the stock market.

Large cap companies in the US are complex beasts. It isn’t a sure thing that a weaker dollar will help them. It isn’t a sure thing that a weaker dollar will add many jobs. We pretend it helps manufacturers, but that’s far from certain when US manufacturing companies have facilities overseas.

On the other hand, the service sector is quite large in the US. Services can be exported and are probably more price sensitive than manufactured products. There is evidence that a weaker dollar helps there. The September 2010 Non-Manufacturing ISM Report on Business, the report I try to make a point not to dedicate a whole post to, indicated a rather significant positive change in exports. The New Export Orders index grew to 58, up from 46.5 in August. That’s a huge swing. These are the non-manufacturing industries likely helped by a weaker dollar:

The six industries reporting an increase in new export orders in September — listed in order — are: Professional, Scientific & Technical Services; Information; Retail Trade; Other Services; Accommodation & Food Services; and Finance & Insurance. The two industries reporting a decrease in export orders in September are: Agriculture, Forestry, Fishing & Hunting; and Wholesale Trade.

Of course, if a currency devaluation race evolves quickly into a trade war (which seems to already be the case with China), many of these gains will be erased independent of the direction of the dollar.

Manufacturing has thus far been a pretty good leader of the recovery. Unfortunately, the industry might be running out of steam. According to the September 2010 Manufacturing ISM Report On Business, manufacturing is still expanding, but at a decreased rate. The PMI came it at 54.4%, down from last month’s 56.3. This was in line with the Bloomberg consensus range of 53.0 to 55.5.

The always important employment index came in at 56.5, down from the amazing 60.4 recorded last month. From the report (emphasis mine):

ISM’s Employment Index registered 56.5 percent in September, which is 3.9 percentage points lower than the 60.4 percent reported in August. This is the 10th 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.

Eight of the 18 manufacturing industries reported growth in employment in September in the following order: Petroleum & Coal Products; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; Fabricated Metal Products; Paper Products; Chemical Products; Machinery; and Transportation Equipment. The three industries reporting a decrease in employment during September are: Wood Products; Plastics & Rubber Products; and Food, Beverage & Tobacco Products.

This is still a strong reading.

The negative parts of the report were made apparent:

The report was issued today by Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. “While the headline number shows relative strength this month as the PMI reading of 54.4 percent is still quite positive, the overall picture is less encouraging. The growth of new orders continued to slow, as the index is down significantly from its cyclical high of 65.9 percent (January 2010). Production is currently growing at a faster rate than new orders, but it typically lags and would be expected to weaken further in the fourth quarter. Manufacturing has enjoyed a stronger recovery than other sectors of the economy, but it appears that weaker growth is the expectation for the fourth quarter. Both the Inventories and Backlog of Orders Indexes are sending strong negative signals of weakening performance in the sector.”

The production index fell to 56.5 from 59.9. This is still rather strong, but the deceleration in the index is worth noting. Most troubling, however, was the rapid growth in the prices index:

The ISM Prices Index registered 70.5 percent in September, 9 percentage points higher than the 61.5 percent reported in August. This is the 15th consecutive month the Prices Index has registered above 50 percent. While 45 percent of respondents reported paying higher prices and 4 percent reported paying lower prices, 51 percent of supply executives reported paying the same prices as in August. A Prices Index above 49.3 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices.

Manufacturers are getting squeezed.

Overall, this was still a bullish report. It isn’t quite as nice as last month’s, nor is it as nice as the January 2010 period of greatest acceleration. But any expansion is welcome. I am not as bullish on future months. A PMI less than 50 would not be a surprise in the next three months.

As I hinted earlier today, the August 2010 Manufacturing ISM Report On Business came in with unexpectedly good results (the data from the Fed indicated a lower reading, but as CalculatedRisk points out, the Fed and ISM data sometimes diverge temporarily). The PMI came in at a fairly strong 56.3, while the Bloomberg consensus range was 51.5 to 54.5. Last month’s reading was 55.5, and this reading was even stronger than the 56.2 in May’s reading. Any number over 50 indicates expansion.

The employment index came in at a strong 60.4. From the report (emphasis mine):

ISM’s Employment Index registered 60.4 percent in August, which is 1.8 percentage points higher than the 58.6 percent reported in July. This is the ninth 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.

Ten of the 18 manufacturing industries reported growth in employment in August in the following order: Transportation Equipment; Paper Products; Printing & Related Support Activities; Primary Metals; Computer & Electronic Products; Fabricated Metal Products; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; and Chemical Products. Furniture & Related Products is the only industry reporting a decrease in employment during August.

Not bad at all. The rest of the report overall was better than last month. Production grew by 2.9 points to 59.9, also considered a positive sign. A little concerning was the fact that imports grew faster than exports. Imports had a reading of 56.5 while exports shrunk to 55.5 (still indicating expansion, just slower expansion than last month).

The divergence of this report and the lower Fed numbers is not unusual by itself. A convergence is expected, though. This either means better Fed numbers (good) or a worse ISM (bad). Most bets are on a lower ISM reading in future months.

Today was the day of the month that a few reports I only loosely follow were released. The rundown:

1. ADP Employment Report - ADP uses their payroll data to give us a bit of a preview on Friday’s Employment Situation report. ADP claims a seasonally adjusted 42,000 jobs were added to private payrolls in July. As a warning, we’re expecting about -100,000 jobs from the census again (give or take 20k). Bloomberg consensus is -70k jobs for Friday’s report, but this little bit of good news provided some people with hope for a surprise to the upside.

2. Challenger Job Cut Report - 41,676 planned layoffs in July. They note that despite 3 consecutive months of increases, this is near the lowest level since the 2001 recession. Every Thursday, however, we’re reminded that new unemployment claims are stuck at levels near the peak of that recession.

3. Non-Manufacturing ISM Report - The NMI came in at 54.3%, indicating expansion. The Employment Index came in at 50.9%, which is too close to flat to be considered good news.

4. They call it WHAT? - Not actually a report. The number of stories in my RSS feed with some variation on “Backdoor Stimulus” today really brought out the inappropriate humor. I’m confident that there are ways to describe refinancing a few trillion dollars in mortgages in a way that doesn’t promote anal sex jokes.

Tomorrow brings the unemployment insurance report. Everyone is waiting for Friday’s jobs report, though.

The July 2010 Manufacturing ISM Report On Business was released today. The PMI came in at 55.5%, down from 56.2. As a reminder, numbers over 50 indicate expansion. We’ve been dropping for a few months now.

The Bloomberg consensus range was 52.5 to 55.5, so this came in at the top of the range. That just means that expectations were for a bigger deceleration.

There was one solid piece of good news: the employment index grew to 58.6 from 57.8. This continues to be rather bullish, and it’s good to see it accelerating again. It’s still not back as high as May’s 59.7, though. Here’s the report’s take on employment (emphasis mine):

ISM’s Employment Index registered 58.6 percent in July, which is 0.8 percentage point higher than the 57.8 percent reported in June. This is the eighth 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.

Ten of the 18 manufacturing industries reported growth in employment in July in the following order: Textile Mills; Paper Products; Computer & Electronic Products; Miscellaneous Manufacturing; Transportation Equipment; Fabricated Metal Products; Primary Metals; Machinery; Electrical Equipment, Appliances & Components; and Chemical Products. The two industries reporting a decrease in employment during July are: Nonmetallic Mineral Products; and Food, Beverage & Tobacco Products.

Unfortunately, the rest of the report wasn’t quite as bullish. Still, with unemployment where it is, who cares about anything else?