Merk Investments: ISM Manufacturing
The headline-manufacturing index of the ISM estimate of economic activity in the industrial sector unexpectedly increased to 50.2 for the month, which is slightly above the 6-month average of 49.3. The primary catalyst for the increased in purchasing managers sentiment appeared to be a slight increase in production to 51.5, a solid build in customer inventories to 55.0 from the 47.0 posted in May and the still solid orders from the external sector which arrived at 58.5.
Although, the move back above the critical threshold of 50.0 indicating growth is a positive development, manufactures still remain on edge as the cost of inputs climbed higher and demand fell in June. The prices paid component increased to 91.5 and new orders modestly declined to 49.6. As one would expect the employment indicator continued to contract and fell to 43.7.
Issues with price increases in commodities continued apace with copper being the only commodity that saw a decrease in costs. Caustic soda and steel were the only commodities that were reported in short supply. Comments by survey respondents reflected the difficulties in coping with the shock in commodities on the part of manufacturing firms. One participant went so far as to state that “the shock waves from higher crude prices continue to put pressure on derivative pricing.” Another noted that the “commodity bubble is killing profitability.”
We include these comments in our research note because we think they reflect to true condition of the domestic industrial sector. The problems in the manufacturing sector will not ease anytime soon due to higher costs and thinning profit margins, which are not going to be materially improved in the months ahead. The prices paid component reached it highest mark since it registered a reading of 93.2 in July of 1979. This should be a timely reminder of the problems in the economy due to the overall commodity shock. Going forward, making matters worse will be the continued dislocation in the manufacturing community caused by the reduction in the schedule for the assembly of vehicles in the domestic auto industry. We think that the improvement in June will prove transitory and that there will be serious problems for industrials later this year.
Joseph Brusuelas
Merk Investments
Chief Economist/VP Global Strategy
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