July ISM – More Fodder For Fed Action

July ISM numbers are out (PMI, NMI) and it appears the down trend hasn’t abated. Manufacturing PMI fell rather hard to 50.9 (barely holding the expansion threshold) although the more important non-manufacturing NMI fell only slightly to 52.7. Given the recent GDP downward revision this is actually not horrible but it’s not good either. We can muddle through this for a couple more months but this economy has got to turn around sooner rather than later or we risk the dreaded double dip. Anyway, here are the highlights:

Bad:

• Manufacturing growth (PMI 50.9 vs 55.3 PM and 55.1 PY)
• New orders continues to swoon off of its Jan/Feb highs. Manufacturing new orders came in at 49.2, indicating the first month of contraction since June 2009.
• Non-man Exports (49.0 vs 57.0 PM), first contraction since June 2010
• Non-man Employment (53.5 vs 59.9 PM)
• Man Production (52.3 vs 54.5 PM)

Good

• Non-man growth is holding up better (NMI 52.7 vs 53.3 PM and 53.7 PY).
• Input costs continued its dramatic decline from Q1 highs on both sides. This is good news for inflation hawks.
• Man Exports held steady vs PM
• Non-man Business Activity up (56.1 vs 53.4 PM)

Analysis
We can see that the trend is clearly down. The silver lining is that input costs have made the most dramatic move of all indicators (off the peak, -31% man and -23% non-man). On average, this should manifest as moderate improvements in COGS vs prior guidance. At the bottom line, lower costs should be partially offset by slower consumer spending. If you’re wondering specifically where the surprises may be…

1. “The three manufacturing industries reporting paying lower prices on average in July are: Miscellaneous Manufacturing; Fabricated Metal Products; and Food, Beverage & Tobacco Products.”
2. “The two [non-manufacturing] industries reporting a decrease in prices paid are: Construction and Public Administration.”

Conclusion
Though decreasing input costs will likely help  Q3 corporate earnings, a continued downward trend would likely send PMI into contraction in August and NMI is probably not far behind. The employment trend is a concern as well. The clock is ticking for monetary intervention.