Why the latest ISM report is good news.

The Institute of Supply Management published thier monthly report on the state of manufacturing in the United States. For the 18th straight month, manufacturing indices contracted, meaning we were once again slowing our manufacturing output, our new orders fell AGAIN, and — woe is me — employment was off AGAIN for the month. Bloomberg has once again decried the structure of our manufacturing industry and in an ironic spin of politic has turned attention back to President Obama and his administration to provide some relief to the present crisis from the recently signed American Reinvestment and Recovery Act (aka “stimulus package”)

http://www.bloomberg.com/apps/news?pid=20601103&sid=aI00J8iplevY&refer=us

I for one am extremely happy with the information that the ISM report, combined with the recent Bureau of Economic Activity (BEA) from the United States Department of Commerce provides. Am I suffering from post-vacation wine intake reduction syndrome? Quite the contrary, let me explain.

The ISM main index (affectionately known as PMI) is an aggregate of many other indices which measure employment, production, new orders, and inventory across many different product-oriented segments of our economy. When any one index goes north of 50 that indicates expansion, south of that number a contraction. In today’s release all of the indicators were in contraction. However, several key indicators had s-l-o-w-e-d their rate of decline, illustrated by a rise in their corresponding index level. Production being one of those indices. And in fact the rate of decline is slowing to a point where if trends continue, we will be in an expansion period (we will be making more “stuff” on average) in five months. But that is not the good news.

What really makes this good news is the fact that the inventories that we have built-up across the sectors (the “stuff” we have already made that is sitting on the shelf) continue to decline. Conventional wisdom may suggest that a contraction in an indicator is a bad thing, but on the contrary this is a very good thing. In order to move inventory “turns” we need to get the “stuff” we have already produced off the shelf and into the hands of consumers willing to pay for it. Fortunately price levels have held steady for the past three months. So the “stuff” we have had sitting on the shelf doesn’t cost any more to buy and some where, someone is buying it.

Long term, though the great news behind the ISM report really comes when you look at the BEA report on the topic of personal savings. Personal savings, the amount as a percentage of income Americans actually “put away” on a monthly basis has been on a skyrocket rise for the past four months. Today’s BEA report of personal savings rate of 5.0% is a 14-year high, which is mind-boggling when you consider that only two years ago we looked at a personal savings rate of -1.7% and eight months ago we had a net personal savings rate of zero.

Again you ask, “what is the good news to this story?” Personal savings on average has been at or near a 20-year average of 10% as a part of American income. Personal savings allows folks to buy appliances and other durable goods (like cars — HELLOOOO Detroit), parents to pay for their kids college tuition, and singles to go on swanky vacations because there is a safety net in the bank. The problem with the Recession of 2008-9 is that there was a non-existent personal savings rate, the American people have been too busy fighting ism by shopping in the mall and buying “stuff.” No other time in the history of our American economy has the personal consumption rate approached 80%. We pumped so much air into that balloon we ran out of air to put in the balloon.

So here’s the deal, and there is no crystal ball. AIG goes bankrupt and you see a ripple in the trendlines. GM doesn’t figure out how to make cars people will buy, and more people go to the unemployment line. We have three months of decreasing rate of inventories, production is beginning to come alive again, and personal savings is on a tear. Map it out and we see that the possibility for our economy being “game on” in five to six months. Until then it won’t be pretty — unemployment will continue to rise or hold steady while we clear out the “stuff” that is on the shelf, and consumer confidence will remain low until that nest egg is rebuilt and the hangover of debt is at manageable levels. Don’t get me started on the “colon cleansing” going on in the housing market, that will take a decade to sort through.

Having said that, the latest ISM repot is very good news indeed. Let’s hope it keeps giving us good news.

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1 Comment

Filed under Operations, Strategy

One response to “Why the latest ISM report is good news.

  1. Interesting blog, I’ll try and spread the word.

    Like

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