Slowdown in Manufacturing stokes recession fears

According to the Manufacturing ISM Report On Business issued today by The Institute for Supply Management (ISM), the Purchasing Managers' Index (PMI) was at 47.7 down from 50.8 in November and 50.9 in October. Forecasters had expected the December index to hit 51.0. December ended 10 consecutive months of growth in the manufacturing sector.

PMI was developed by the U.S. Department of Commerce (DOC) and the The Institute for Supply Management (ISM) and is part of the Manufacturing ISM Report On Business. The report is released at the beginning of every month reporting data for the previous month. PMI adjusts five components of the Institute's monthly survey and applies weights to calculate a single monthly index number: New Orders, 30%; Production, 25%; Employment, 20%; Supplier Deliveries, 15%; and Inventories, 10%. PMI is an excellent short term economic barometer. According to ISM, there is a close parallel between growth in real Gross Domestic Product (GDP) and PMI. The index explains about 60% of the annual variation in GDP in the last 10 years.

A PMI reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally declining. PMI in excess of 41.9 percent, over a period of time, indicates that the overall economy, or gross domestic product (GDP), is generally expanding; below 41.9 percent, it is generally declining. According to ISM, the past relationship between the PMI and the overall economy indicates that the PMI average for January through December (52.2 percent) corresponds to a 3.2 percent increase in real gross domestic product (GDP) annually. In addition, if the PMI for December (47.7 percent) is annualized, it corresponds to a 1.8 percent increase in real GDP annually."

4 of the 5 components were showing the manufacturing economy to be contracting (New Orders, Production, Employment, and Supplier Deliveries). Inventories contracted, but were still above the expansion level.

There seems to be some inflationary concerns in these remarks from some of the respondents in the report:

• "Have received a large volume of price increase notices in the last month with increases between 3 percent to as much as 15 percent." (Chemical Products)
• "Business is good, but higher raw material prices are squeezing margins." (Primary Metals)
• "Upward price of raw materials, plus low inventories, is pushing price of resins skyward." (Plastics & Rubber Products)
  

Here is a chart of PMI for the last 40 years. 1989 was the only time the index went below 46 without being in a recession. You can click on the chart for a larger view.

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