ISM: Anywhere You Look, It’s Bad

The Institute for Supply Management (ISM) -- formerly NAPM -- has been giving us data on US manufacturing for 50 years. Many other countries now have similar numbers, often published by a Purchasing Management Institute (PMI). The data is presented similar fashions. If an item is growing, it’s above 50, and if it’s contracting, it’s below 50. Depending on the quality of the data, the index can be well above or well below 50. While a level of say, 57, as opposed to 62 or 52, for the manufacturing index doesn’t reveal all that much, there are 2 questions that are very useful to ask in the surveys. First, is the number above or below 50 -- is it growing or contracting? Second, what’s the trend been over the past 3-6 months?

Looking at those two factors, it’s ugly all over the world. Russia is at 33.8, down 20% from November. India is down to 44, and the trend is descending. Hong Kong is down 6 months in a row to 39. Australia is at 33.7. (Thanks to Dennis Gartman for the world tour.) We’ll look next week at China, whose numbers show a sharp decline in export growth.

We got the US ISM numbers today, and they were awful. The overall index is at 32.4, down over 25% in the last 3 months. This is the lowest level since 1980, in what was a severe recession. The ISM survey points to one of the deepest contractions in industrial output in the post-World War II era this quarter. The forward-looking details were weak and point toward further declines in the ISM manufacturing index. Businesses are cutting orders, inventories, and workers because of tight credit conditions, declining final demand, and shattered confidence. Manufacturers reported in December that their customers' inventories were too high, a bad omen for future production.

But when you look at the components, it gets even more sobering. New Orders are down over 50% from 6 months ago, to 22.7. This is the lowest number since they began keeping records in 1949. Production is down to 25.5. New Export Orders were way down (35.5), as was Order Backlog (23).

Moody’s www.economy.com says:

"Another standout in the December report was the decline in the prices-paid index [down to 18! -JM] which fell to its lowest level since 1949. The abrupt decline in energy and other commodity prices is driving the index lower. Lower input costs may entice manufacturers to pass on the savings via reducing their prices. If businesses broadly across industries cut prices to preserve some sales, it will heighten the threat of deflation."

This is all suggestive of an economy in serious decline. The GDP for the 4th quarter should be down somewhere between 4-5%. It’s likely we’re going to see even more earnings downgrades in the next few months, and as I outline below, we’ve probably not yet hit bottom. As long as the ISM numbers look like the ones we just analyzed, things are likely to get more difficult. And that goes for the world in general, not just the US economy.