Thursday, August 5, 2010

ISM Shows Continued Expansion; Factory Orders Drop

From the ISM:
"The NMI (Non-Manufacturing Index) registered 54.3 percent in July, 0.5 percentage point higher than the 53.8 percent registered in June, indicating continued growth in the non-manufacturing sector at a slightly faster rate. The Non-Manufacturing Business Activity Index decreased 0.7 percentage point to 57.4 percent, reflecting growth for the eighth consecutive month. The New Orders Index increased 2.3 percentage points to 56.7 percent, and the Employment Index increased 1.2 percentage points to 50.9 percent, reflecting growth after one month of contraction. The Prices Index decreased 1.1 percentage points to 52.7 percent in July, indicating that prices are still increasing but at a slower rate than in June. According to the NMI, 13 non-manufacturing industries reported growth in July. Respondents' comments are mixed. They vary by industry and company, with a tilt toward cautious optimism about business conditions."

The 13 industries reporting growth in July based on the NMI composite index — listed in order — are: Real Estate, Rental & Leasing; Arts, Entertainment & Recreation; Management of Companies & Support Services; Agriculture, Forestry, Fishing & Hunting; Retail Trade; Information; Other Services; Transportation & Warehousing; Public Administration; Mining; Health Care & Social Assistance; Educational Services; and Wholesale Trade. The four industries reporting contraction in July are: Construction; Utilities; Accommodation & Food Services; and Finance & Insurance.

Note a few points.

1.) New orders and employment were higher.

2.) 13 industries were showing expansion while 4 were contracting.

3.) The anecdotal information was mostly positive.

From the AP:

Factory orders fell in June for the second straight month due to lower demand for steel, construction machinery and aircraft.

The Commerce Department said Tuesday that factory orders dropped by 1.2 percent to a seasonally adjusted $406.4 billion. Analysts expected a much smaller drop.

May's decline was revised to a steeper decrease of 1.8 percent. It was initially reported as a 1.4 percent drop.

The two months of declines follow nine straight month of increases, as manufacturers ramped up production last fall and helped the U.S. economy grow after four quarters of contraction.

But the sector has since shown signs of stumbling, raising concerns that the economy will slow in the second half of this year. On Monday, a trade group said U.S. manufacturing grew for the 12th straight month in July, but at a slower pace.

The factory orders report "suggests that the manufacturing sector has lost some of its growth momentum," John Ryding, an economist at RDQ Economics, wrote in a note to clients.

Here is a chart of the data:

Notice the orders appear to have peaked. Manufacturing led the way out of the recession. Now we need to see if it slows but doesn't die.