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.

ISM Increases

From the Institute for Supply Management:

Economic activity in the manufacturing sector expanded in February following a decline in January, while the overall economy grew for the 64th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

The report was issued today by Norbert J. Ore, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "February proved to be a good month in the manufacturing sector as New Orders, Production and Employment contributed to a solid growth scenario. The Inventories Index showed significant reduction in manufacturers' inventories for the second consecutive month, and the Backlog of Orders Index is growing once again. While the prices manufacturers pay reached their highest level in five months, concern about prices is still minimal due to the small number of commodities indicated as up in price. The trend in manufacturing, as well as the overall economy, is for slow but continuing growth."

Looking at the numbers, new orders were up 4.6% and production was up 4.5%. These are good numbers and they have helped the market rally from a big drop at the opening.

However --

In February, the ISM Prices Index registered 59 percent, indicating manufacturers are paying higher prices on average when compared to January. While 32 percent of respondents reported paying higher prices and 14 percent reported paying lower prices, 54 percent of supply executives reported paying the same prices as the preceding month. A Prices Index above 47.2 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Index of Manufacturers Price

The number of executives who reported paying higher prices increased from 24% to 32%. This is a number that bears watching.

Chicago PMI Drops Slightly

Here is a link to the full report.

The overall index dropped from 48.8 to 47.9.

Production decreased slightly, but new orders increased slightly.

Inventories increased in a big way from 38.5 to 56.5 -- the largest gain in 30 years.

Here's a big phrase from the report: overall demand down 28% - 30% and sales incentives are high. When you have to pay people to buy your products you have problems.

While this report isn't completely recessionary, it is leaning in that direction. In addition, we have two downward trends in the overall business barometer number. The first started at the beginning of 2005, and the second started in mid-2006. Things still appear to be moving down, although I wouldn't call this a recessionary stage yet. But we're pretty close.

Chicago PMI Drops

From the Chicago Purchasing Managers Website:

The Chicago Purchasing Managers reported the Chicago Business Barometer fell below neutral, ending 43 months ofpositive readings.

- Production advanced while New Orders retreated;

- Prices Paid continued to slump toward neutral;

- Employment fell to the lowest level in four years;

Buying Policy: 3 month average lead-times were longer, but January bucked the trend.

The various indexes within the report showed areas of concern. New orders have been dropping for a few months. Employment is at its lowest level in almost four years. One of the industry representative comments said overall demand was down almost 30% with high sales incentives. The new orders and overall production levels have been trending down for about 2 years, only now falling into contraction levels.

The comments section called the report "worrisome".

Chicago PMI Expands in December

From Bloomberg

Manufacturing in the U.S. unexpectedly expanded and construction spending fell less than forecast, signaling the worst of the economic slowdown is over.

The Institute for Supply Management's manufacturing index rose to 51.4 in December from 49.5 in November, when activity contracted for the first time in more than three years. Spending on construction dropped 0.2 percent in November after a 0.3 percent drop in October that was smaller than originally reported, the Commerce Department said today in Washington.

The figures suggest the economy will extend the five-year economic expansion into 2007, weathering a slump in housing and a factory downturn that weakened growth in the past three quarters. The dollar rallied, stocks extended their advance and bonds pared gains.

Let's go to the report to get the complete picture.

New orders and production increased. This is a good sign. Prices paid decreased, which should help ease a bit of the Fed's inflationary worry. Employment is an area of concern, as it is still registering a contraction. Also, exports are decreasing faster than imports. This will not help the trade deficit if it continues.

Overall, however, this is a good report. Next month will be very important as it will indicate if the drop below 50 was a 1-time situation or not.

Chicago PMI "Regains Footing"

From the Release

The Chicago Purchasing Managers reported the Chicago Business Barometer regained its footing to register some improvement.

- Production and New Orders regained strength while the rate of decline in Order Backlogs stabilized;

- Prices Paid were unchanged from November;

- Employment contraction continued as reported layoffs increased while hirings decreased

Let's look a bit deeper into the survey.

The index dropped from September through November, then rebounded in December. We'll have to wait until January to see if this number continues its upward movement.

There was a nice upward move in new orders. But these can always be canceled, so until they get into production this number may be a bit high. Also note this was the seasonally adjusted number. The unadjusted number increased .5 instead of 5.8.

The prices paid component increased slightly. This is not a good sign for the Federal Reserve policy going forward and takes some wind out of the "Fed has to lower rates in the new year" argument.

There were several comments about slowing construction and how that was having a negative impact. There was also a comment about how the lack of a federal budget was hurting overall production. This implies that when a budget resolution is passed, the Chicago PMI could see a 1-month jump. Finally, there was a comment about manufacturing being moved off-shore while financial work was remaining onshore.

Short version: A 1 month improvement that contains some future concerns (prices paid and employment) and will need at least 1-month of upward verification. In other words, this could be a trend reversal, but we need more information going forward.