The Institute for Supply Management released its monthly manufacturing index. The data shows that the manufacturing sector is still contracting with the headline number rising to 42.8 in May, up from 40.1 in April. This number was ahead of analyst expectations of 42 flat. 50 represents the dividing line between a contracting manufacturing sector and an expanding one.
The key to the ‘beat’ was new orders, which rose from 47.2 in April to 51.1. That says that new orders in the manufacturing sector are growing for the first time in 18 months. You should also notice that customers’ inventories are moving in a big way as well, with that number registering too low and the contraction of inventories actually accelerating. Translation: the much fabled de-stocking of inventories is gathering pace, setting the stage for inventories to make a positive contribution to GDP by Q3. You should see these two trends as leading indicators for a recovery because they are the first two sub-indices to switch direction in this incipient bottoming process. You should also notice that the overall economy is also now growing according to this index.
The market sees this as very bullish and has rallied despite what I see as a less positive personal income report. In essence, June has started off with generally positive data surprises which is supportive of equities.
I recently said you should see industrials as a canary in the coalmine for recovery as these are cyclical stocks and industries, so the ISM Index is really one to watch going forward.
Compare the above chart to the one from December 2008 to see how New Orders have rallied and how customers’ inventories have contracted.
Update: See the video below where the ISM’s Norbert Ore gives his take on this.
Manufacturing ISM Report On Business® – ISM