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.

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?

Good, I can save time on my posts tonight (still will make my summary auto post). The June 2010 Manufacturing ISM Report On Business is worth scanning, but I’m happy when someone else does the work. My bulleted summary:

1. PMI at 56.2, down from 59.7 (numbers over 50 indicate expansion)
2. Bloomberg consensus was for 57.6 to 59.7
3. Employment at 57.8, down from 59.8
4. Every sub-index was “slower” (this was only good news for both inventory metrics, which have been contracting, and are now contracting slower), except Imports, which was unchanged

On to the Housing data. This was expected to come in lower, but a 30% plunge certainly disappointed a few folks.

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.