Monday, April 2, 2007

National ISM Drops Slightly

From the ISM:

"Manufacturing improved slightly in March as the PMI reflected growth for the second consecutive month. The New Orders and Production Indexes advanced while the Employment and Inventories Indexes declined. A positive for March is the Customers' Inventories Index (falling below 50 percent after five consecutive months above the breakeven line), which is a possible indication that manufacturers' inventories are nearing satisfactory levels. On the negative side, prices appear to be surging for certain commodities in the face of slower growth."

Here is an important section from the report, titled "What respondent's are saying:

* "Slowdown evident, could be based on inventory in the channel." (Computer & Electronic Products)
* "Industry preparing customers for price increases related to corn/grain cost increases." (Food, Beverage & Tobacco Products)
* "Raw material cost soared due to the largest one-month price increase for ferrous scrap since September of 2005." (Primary Metals)
* "General business conditions show significant signs of slowing in the manufacturing sector." (Transportation Equipment)
* "Business is slowing, but we are slightly ahead of last year's sales. We are projecting a flat year in sales for 2007." (Furniture & Related Products)

First of all, this report casts serious doubt on the large increase in the NAPM Chicago last week. This report indicates that number was probably off and will be revised downward.

Also notice the anecdotal evidence from the report. The general consensus is business is slowing. And the fact that agricultural prices are increasing at a time when gas is already higher that year-ago levels does not bode well for inflation and interest rate policy.

Here's how Bloomberg reported the news:

Manufacturing growth in the U.S. slowed in March and an index of costs rose to the highest since August as weakness in auto demand and a slump in housing restrained production, an industry report said.

The Institute for Supply Management's manufacturing index fell to 50.9 from 52.3 in February. Readings of more than 50 signal expansion.

Businesses are holding back on investment in capital equipment and are sitting on stockpiles of unsold goods, government reports last week indicated. That's keeping a lid on production growth at companies such as Siemens Energy & Automation, a Georgia-based supplier of equipment to builders and manufacturers

Rising inventories are also a growing concern. As businesses have more stuff on hand, they will decrease their purchases of more raw materials to make stuff. Increasing inventories were a prime reason for the upward revision for 4th quarter GDP, which signals slower growth ahead.

Reuters adds the following:

An index of U.S. manufacturing grew at a slower pace in March than in February, with the inflation component showing a jump and employment contracting, according to a survey published on Monday.

Now we add contracting employment to the mix of slower growth and higher prices.