March 2013 ISM Reports

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As foretold by several regional reports (especially the Chicago Business Barometer), the most-closely followed nationwide manufacturing diffusion index expanded in March, but at a much slower rate than in February. The Institute for Supply Management’s (ISM) PMI registered 51.3 percent, a decrease of 2.9 percentage points from February's seasonally adjusted reading of 54.2 percent (50 percent is the breakpoint between contraction and expansion). March’s PMI represented the biggest miss to expectations (of 54.0) in 13 months -- below the lowest estimate, in fact -- driven by a collapse in new orders (from 57.8 to 51.4 percent). Respondent quotes were mixed, with one Wood Products respondent saying, "Market continues to be strong, and our production is exceeding plans at this time." 

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The pace of growth in the service sector paralleled that in the manufacturing sector. The non-manufacturing index (now known simply as the “NMI”) registered 54.4 percent, 1.6 percentage points lower than February’s 56.0 percent (expectations were for a much smaller 0.5 percentage point drop, making March’s NMI print the biggest “miss” in a year). The NMI was dragged lower as a result of significantly slower growth in new orders, employment, and “net” exports. “The majority of respondents' comments continue to be positive about business conditions,” said Anthony Nieves, chair of ISM’s Non-manufacturing Business Survey Committee. “However, there is an underlying concern regarding the uncertainty of the future economy." 

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Wood Products reported a solid, broad-based pickup in activity. Paper Products expanded as well, with only backlogged orders offsetting the other sub-indices. Only the employment sub-index provided a drag on Real Estate. Construction exhibited growth across most sub-indices, while Ag & Forestry contracted.

Input price increases greatly outweighed decreases. Roughly 30 commodities were up in price, compared to just six commodities whose prices declined. Relevant commodities up in price included lumber (including pine and treated); plywood; corrugated boxes; natural gas; and roofing products and shingles. Gasoline and diesel fuel were listed as both up and down in price. No relevant commodities were in short supply.

Although the ISM surveys quantify opinion instead of facts or data, certain elements have good (e.g., manufacturing new orders) to excellent (e.g., non-manufacturing business activity and new orders) track records in spotting an incipient recession. So, where to from here? At least one well-respected blogger believes disaster is lurking around the corner (see here and here); his opinion cannot be ignored now that Goldman Sachs’ Global Leading Indicator has moved into “slowdown” territory. But because service business activity and new orders are well inside expansion territory, Steven Hansen, of Econintersect.com, believes the general upward trend of ISM services seen over the last few years remains “in play.”

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.