Manufacturing drops dramatically as the economy contracts

The Institute for Supply Management released their monthly Manufacturing ISM Report on Business today. The Purchasing Manager's Index (PMI) came in at 38.9% for October which is down from 43.5% in September.  This is a dramatic drop from August 2008 which was 49.9%. Economist's had expected PMI to drop to 41%.  PMI is now at the lowest level since September 1982.  A PMI reading of 38.9% 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 September (43.5 percent) is annualized, it corresponds to a 0.8 percent increase 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:

• "Credit market causing suppliers to run closer on terms." (Food, Beverage & Tobacco Products)
• "Appear to be bouncing along the bottom — volume is good but pricing is tough." (Primary Metals)
• "Although the volume was down compared to last month, the volume was still higher than last year at the same time." (Chemical Products)
• "Hurricane in Houston disrupted production for 10 days at our plant." (Fabricated Metal Products)
• "Delivery issues continue across our range of purchased commodities as suppliers trim inventory commitments." (Electrical Equipment, Appliances & Components)

Manufacturing has fallen off a cliff after holding up well in this financial downturn.  Whether or not we are in a recession is no longer being debated.  Now the question is how bad will things get.  In the previous recessions, PMI has rebounded quickly but after the recession has ended.

Sphere: Related Content