Financial Sight: PMI posts small gain; indicator shows manufacturing and economy still contracting

The Institute for Supply Management released their monthly Manufacturing ISM Report on Business today. The Purchasing Manager's Index (PMI) came in at 35.6% for January which is up from 32.9% for December which was the lowest PMI had reached since May 1980. Economist's had expected PMI to drop to 32.5%. A PMI reading of 35.6% suggests that the manufacturing economy and the overall economy are both contracting. Per ISM:

"A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting...if the PMI for November (36.2 percent) is annualized, it corresponds to a 1.5 percent decrease in real GDP annually....A PMI in excess of 41.1 percent, over a period of time, generally indicates an expansion of the overall economy."

Here is what some of the respondents to the ISM survey are saying:

"The only positive thing of late is that the U.S. dollar has strengthened significantly against other currencies. We import the majority of our materials so this will have the effect of lowering our COGS." (Transportation Equipment)
"Steel industry is our main customer, and they have had a real slowdown." (Computer & Electronic Products)
"Criteria for projects is significantly higher with very short ROI periods." (Food, Beverage & Tobacco Products)
"We have revised downward our top-line sales estimates for CY2009 by 8 percent due to the continued softness we see in the housing sector." (Machinery)
"Suppliers are trying to hold onto pricing, but petrochemical and commodity prices are dropping like a rock." (Plastics & Rubber Products)

In the past, when PMI has dropped below 40, the recovery is swift, averaging a 14.7% point rise in three months. The current 2.7% point rise is minor in comparison.