Manufacturing ISM Weaker Than it Looks; Digging Into the Numbers; Inventory Restocking Accounts for Much of the Rise

Inquiring minds are digging into June 2011 Manufacturing ISM Report On Business� to better understand the unexpected rise in PMI from 53.5 to 55.3.

Manufacturing at a Glance



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Inventory Replenishment

For all the excitement over the 1.8 point rise, much of it is restocking inventories in the wake of the tsunami.

I called the ISM within minutes of the release to find out what portion of the overall 1.8 point rise could be attributed to inventories rising 5.4 points and what portion to customer inventories rising 7.5 points.

I also asked what portion of the inventory rise could be attributed to the tsunami. Finally, I asked what portion could be attributed to the class "Fabricated Metal Products" because that is the bucket for auto parts.

However there is only one person taking such calls at the ISM and her phone is probably ringing off the hook. I did not yet hear back.

Some of the answers came from elsewhere. From Goldman Sachs as posted on Zero Hedge.

BOTTOM LINE: The ISM beats expectations and rises in June. The details of the report, however, were weaker than the headline as more than half of the headline increase was due to an increase in inventories

The Institute for Supply Management (ISM) rises unexpectedly in June, up 1.8 points to 55.3. As the median forecast and ourselves had looked for a decline, this is clearly an encouraging upside surprise. The composition of the report, however, was on the weaker side. Specifically, a sharp increase in the inventories index (from 48.7 to 54.1) explained 1.1 points of the 1.8 increase in the headline index. If anything, an increase in inventories is a negative for future activity. The remaining 0.7 point of the headline increase was due to small increases in new orders (by 0.6 point to 51.6), production (by 0.5 point to 54.5), supplier deliveries (0.6 point to 56.3) as well as a more sizable increase in employment (1.7 points to 59.9).

Details

• New orders barely rose and flirt with contraction.
• Backlog of orders is in contraction for the first time.
• Imports dropped 3.5 points and flirt with contraction.
• Prices paid dropped along with commodity prices and most likely will drop again next month.

US ISM an Outlier

Earlier this morning I asked China PMI Lowest Since February 2009, on Verge of Contraction; 18-Month Low in Europe; US ISM Unexpectedly Rises; US an Outlier?

Scorecard

1. China on Verge of Contraction
2. Germany 17-Month Low
3. Europe 18-Month Low
4. Italy, Ireland, Spain, Greece in Contraction
5. US ISM Rises

US an Outlier?

I believe the US is an outlier. Manufacturers are gearing up following the Japanese tsunami, expecting a second-half revival that will not come.

The partial answers to my ISM questions help confirm my thoughts. If I hear from the ISM, I will post an addendum.

Addendum - Reply from ISM:

The PMI is an equally weighted composite of New Orders, Production, Employment, Supplier Deliveries, and Inventories (inputs to Manufacturing). Customer Inventories is tracked separately to add to the overall insights, but is not factored into the PMI.

We did not receive any commentary from our respondents indicating that the "Japan effect" is driving Inventories.

Since it is equal weighted of five components, the effect of inventories is 5.4 divide by five, or 1.08 (1.1) of the overall 1.8 rise as noted by Goldman Sachs.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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