Weakening ISM Manufacturing Report

The ISM Manufacturing PMI was 58.1 which missed estimates for 59.5 and was below the prior report of 60.2. Even though this report missed estimates, it was exactly in line with what I thought would be reported because I looked at the regional Fed reports. They implied a PMI of 58. The chart below shows the regional Fed composite index compared to the ISM PMI. These soft data reports have been stronger than the industrial production report. That being said, I look at all indexes to determine where the economy is headed.

The new orders index fell 3.3 points to 60.2 from 63.5. The production index fell from 62.3 to 58.5. The ISM PMI had been more optimistic than the hard data, so this weakness could mean a slowdown is coming. To be clear, it still shows growth as anything above 43.2% is positive. This PMI is equivalent to 4.6% GDP growth. The weakest reading in the past 12 months was 57.3.

As I discussed after the GDP report came out, the decline in inventory investment hurt GDP growth by 1 point. Firms sold products at a quickened pace to get out in front of the tariffs and then didn’t invest in inventory to replenish what they sold because they are expecting a slowdown caused by the tariffs. The situation is interesting because as you can see in the chart below, the customer inventories index is low as it fell 0.3 to 39.4. However, the inventories index increased 2.5 points to 53.3. There may have been intentional stockpiling to avoid shortages related to tariffs and high steel costs. The chart shows inventories are poised to build. In essence, the situation comes down to tariffs. If there ends up being a trade war, then inventories are too high. If the skirmishes are solved, there isn’t enough inventory.

The biggest reason the index declined is because of the deliveries decline as the index fell from 68.2 to 62.1. Delays in June were the longest in the 70-year history of this report which means it normalized in July. Exports were strong as the index only declined 1 point to 55.3. They were weak in the Markit report I’ll discuss next. The prices index fell, which makes sense because the delivery delays fell, inventories rose, and production fell. The prices index fell 3.6 points to 73.2. That’s still an extremely high reading, so don’t take inflation off your radar screen.