April 2013 ISM Reports

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As foretold by the Chicago Business Barometer, growth in the most-closely followed nationwide manufacturing diffusion index nearly stalled in April. The Institute for Supply Management’s (ISM) PMI registered 50.7 percent, a decrease of 0.6 percentage point from March's seasonally adjusted reading of 51.3 percent (50 percent is the breakpoint between contraction and expansion). April’s PMI actually exceeded expectations (of 50.6), however. The greatest disappointment came from the 50.2 percent reading in the Employment index, down 4.0 percentage points on the month. It represented the lowest reading since November, tied with the biggest sequential drop since 2008 in absolute terms, and the biggest drop in percentage terms since the Great Financial Crisis. Without the increase in new orders and production, the PMI likely would have fallen into contraction.

Respondent quotes were mixed, with one Wood Products contributor saying, "Market has slowed this month -- weather in some parts of the country, also customers built inventory in anticipation of building increase, but the economy is still slow to pick up this spring." 

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“Production [in manufacturing] was up but inventories were way lower,” Mish Shedlock observed. “The drop in inventories, in conjunction with a big slowdown in employment, is likely a leading indicator of future production.”

“The positive surprise that does not fit into the above assessment is that new orders grew at a faster rate,” Shedlock continued. “Next month may be telling. I expect the new order divergence to resolve to the downside as the global economy and the U.S. economy are both slowing.”

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 53.1 percent, 1.3 percentage points lower than March’s 54.4 percent (expectations were for a 53.7 percent reading). The business activity, new orders, employment and prices indexes all dropped during the month. “Respondents' comments remain mostly positive about business conditions,” said Anthony Nieves, chair of ISM’s Non-manufacturing Business Survey Committee. However, “cost management and revenue pressures are areas of concern for many of the respective companies.” Our “take” on respondents’ comments is more pessimistic than Nieves’. E.g., one Ag & Forestry respondent observed a weakening trend in demand. 

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Wood Products reported a slowdown in activity; a pickup in new export orders was perhaps the only good news for that sector. By contrast, Paper Products experienced a solid, broad-based expansion. The service sectors we track all reported growth, although underlying support was especially spotty for Ag & Forestry.

Input price increases greatly outweighed decreases. Roughly 15 commodities were up in price, compared to just five commodities whose prices declined. Relevant commodities up in price included caustic soda, corrugated boxes, lumber, and natural gas. Diesel fuel was listed as both up and down in price. Gasoline was down in price. No relevant commodities were in short supply.

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.