Summary
Last week, the Institute for Supply Management reported February results for its respective indexes designed to measure the economy's manufacturing and service-sector activity. Both results were above consensus expectations, but probably not enough above to justify the recent outburst of bullishness in some circles regarding the prospects for first-quarter gross domestic product. In addition, the price component of both ISM measures remained at levels that were not only high by historical standards, they continued to expand!
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Foreword
The mere existence of a publication like Shadow Government Statistics makes more than evident how John Williams and I feel about the problems posed by the growing lack of sensibility associated with much of the critical economic data coming out of various government agencies. Also evident, therefore, is the importance we attach to private-sector sources that provide generally sound data on which to base analytical judgments.
I personally view the monthly numbers generated by the Institute for Supply Management (formerly known as the National Association of Purchasing Management) on the economy's manufacturing and service-sector activity as a very important analytical resource. In turn, this explains why I expend the time I do each month in presenting these data.
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General Observations
* Last Wednesday (3/1), the Institute for Supply Management reported that its index designed to measure the economy's manufacturing activity ("PMI") rose in February, to 56.7. This compared with a January reading of 54.8. The February result was roughly one point better than the consensus estimate.
* Last Friday, (3/3), ISM released results for its February service-sector index. The index came in at a reading of 60.1, compared with January's 56.8. The February result was about two points better than the consensus forecast.
(NOTE: Overall index and sub-index readings above 50.0 indicate expansion; readings below 50.0 indicate contraction.)
Each year, commencing with its January data releases, ISM begins employing new seasonal-adjustment factors. These are formulated by the government, in this case, by the US Department of Commerce, and possibly represent a weak link regarding the ISM data.
And speaking of the Commerce Department, last week, Commerce released revised fourth-quarter 2005 GDP data. The report showed real growth at a 1.6% rate, not significantly better than the paltry 1.1% rate indicated in the first report, issued at the end of January.
As part of its attempt to minimize the implications of the economy's very sluggish fourth-quarter performance, Wall Street bulls have now shifted gears to talking almost exclusively about the huge snap-back taking place during the current quarter. Some are even talking about growth approaching a 6% annual rate.
In the next couple days, I'm going to publish a review of last week's GDP revisions. In the meantime, though, I will opine that last week's ISM manufacturing and service-sector reports, while quite good and exceeding expectations, still were not good enough when coupled them with January results to suggest 6% real growth during the current quarter.
February ISM Manufacturing Data
* ISM's February PMI came in at 56.7, versus January's reading of 54.8.
* In February of 2005, the PMI stood at 55.6, 1.1 points or a negligible 1.9% below February 2006.
* The February 2006 result was modestly above a consensus estimate that had been looking for something around 55.5.
* The prices-paid component registered a 2.5 point decline during February, to 62.5. However, this kept this key area at a high level by historical standards, and even with the February drop, this series stood 14.0 points or 28.9% above its recent low of 48.5, set last July.
* The February performance of selected components:
Employment 3.7 to 55.0
Inventories 3.1 to 49.6
Backlog of Orders 1.0 to 54.5
Prices Paid -2.5 to 62.5
Supplier Deliveries -3.1 to 52.2 (= slower)
New Orders -3.9 to 61.9
* Some comments from ISM's "What Respondents Are Saying" section of last week's report:
- "We are seeing fuel surcharges converted to price increases" (Printing & Publishing).
- Price increase requests from U.S. suppliers are forcing companies like ours to low-cost countries" (Furniture).
- "Titanium costs are exceeding my expectation and now heading into unprecedented cost levels where alternate materials will need to be used to counteract" (Electronic Components & Equipment).
- "Margins for 2005 were a full one-third ahead of 2004 on level sales" (Fabricated Metals).
- Disappointing corporate profit announcements and the restructuring of the automotive companies are having a ripple effect in the manufacturing world" (Industrial & Commercial Equipment & Computers).
* Over the 12-month period ended February, the overall PMI registered a high of 58.1 (October 2005). Its low of 51.8 was set last May. The 12-month average came in at 55.4, 1.3 points or 2.3% below February's result. The highest reading since January 2003 was 63.1 (occurring in December of 2003), 6.4 points or 11.3% above February's reading.
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INSTITUTE FOR SUPPLY MANAGEMENT PMI INDEX
-- TOTAL INDEX AND PRICE COMPONENT
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Respondents Reporting
Higher, Lower, or
Unchanged Prices
Month/ Overall Price ---------------------
Year Index Index Higher Lower Unch.
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02/06 56.7 62.5 36% 11% 53%
01/06 54.8 65.0 38% 8% 54%
==========================================
12/05 55.6 63.0 37% 11% 52%
11/05 57.3 74.0 53% 5% 42%
10/05 58.1 84.0 70% 2% 28%
09/05 58.0 78.0 60% 4% 36%
08/05 53.5 62.5 36% 11% 53%
07/05 56.4 48.5 24% 27% 49%
06/05 54.0 50.5 22% 21% 57%
05/05 51.8 58.0 32% 16% 52%
04/05 53.8 71.0 52% 10% 38%
03/05 55.3 73.0 51% 5% 44%
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02/05 55.6 65.5 38% 7% 55%
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01/05 56.3 69.0 45% 7% 48%
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12/04 58.6 72.0 52% 8% 40%
11/04 56.9 74.0 55% 7% 38%
10/04 56.8 78.5 61% 4% 35%
09/04 58.0 76.0 55% 3% 42%
08/04 59.6 81.5 67% 4% 29%
07/04 61.5 77.0 58% 4% 38%
06/04 61.5 81.0 66% 4% 30%
05/04 62.9 86.0 74% 2% 24%
04/04 63.0 88.0 77% 1% 22%
03/04 62.3 86.0 73% 1% 26%
02/04 62.2 81.5 65% 2% 33%
01/04 62.9 75.5 54% 3% 43%
==========================================
12/03 63.1 66.0 37% 5% 58%
11/03 60.6 64.0 33% 5% 62%
10/03 57.2 58.5 26% 9% 65%
09/03 54.4 56.0 21% 9% 70%
08/03 55.5 53.0 19% 13% 68%
07/03 52.3 53.0 21% 15% 64%
06/03 50.5 56.5 26% 13% 61%
05/03 50.0 51.5 21% 18% 61%
04/03 46.5 63.5 37% 10% 53%
03/03 46.4 70.0 47% 7% 46%
02/03 49.9 65.5 <------ NA ------>
01/03 52.8 57.5 <------ NA ------>
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Commodities Reported in Short Supply During February:
(NOTE: The number of consecutive months the commodity is listed is indicated after each item.)
Titanium (2) is the only commodity reported in short supply.
Commodities Reported Up in Price During February:
Aluminum (7); Aluminum Products (3); Brass Castings; Chemicals (25); Copper (9); Copper Products (3); Corrugated Containers (4); Linerboard; Natural Gas (43)*; Nickel (2); Petroleum Products (2); Paper (2); Plastics (19); Polypropylene Resin; Stainless Steel; and Sugar.
Commodities Reported Down in Price During February:
Natural Gas (2)* is the only commodity reported down in price.
*Reported up and down in price.
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February ISM Non-Manufacturing Data
* Last Friday (3/3), ISM reported that its index designed to measure the economy's service-sector activity came in at 60.1, versus January's reading of 56.8.
* In February of 2005, this index stood at 60.4, 0.3 points or 0.5% above February 2006.
* The consensus estimate was looking for a February 2006 result of around 58.0. Thus, the number actually reported exceeded expectations.
* The February performance of selected components:
Employment 7.1 to 58.2
Backlog of Orders 1.5 to 54.0
New Orders 0.2 to 56.2
Inventories -2.0 to 53.0
Supplier Deliveries -2.0 to 52.5 (= slower)
Prices Paid -2.4 to 64.8
(NOTE: Overall index and sub-index readings above 50.0 indicate expansion; readings below 50.0 indicate contraction.)
* The index's price component fell 2.4 points in February, to 64.8. The September 2005 reading of 78.4 was this component's highest reading in the history of the overall service-sector index (inception in July of 1997). Thus, February's 64.8 remained a high number in both relative and absolute terms and continued to indicate price expansion. In fact,it marked the 47th consecutive month of rising prices.
* For the 12 months ended February, the service-sector index's high was 64.8 (August 2005), and its low was 53.7 (September 2005). The 12-month average through February was 59.8, 0.3 points or 0.5% below the February result.
* To some degree, the back-to-back strongest/weakest readings in August and September reflected the influence of Hurricane Katrina on the overall results.
* The service-sector index's most recent high was 65.9, occurring in April of 2004. This was 5.8 points or 9.7% above February's result.
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INSTITUTE FOR SUPPLY MANAGEMENT
NON-MANUFACTURING INDEX -- TOTAL
INDEX AND PRICE COMPONENT
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Respondents Reporting
Higher, Lower, or
Unchanged Prices
Month/ Overall Price ---------------------
Year Index Index Higher Lower Unch.
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02/06 60.1 64.8 39% 4% 57%
01/06 56.8 67.2 37% 4% 59%
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12/05 61.0 67.2 33% 7% 60%
11/05 59.3 70.8 44% 8% 48%
10/05 59.2 74.1 54% 5% 41%
09/05 53.7 78.4* 58% 2% 40%
08/05 64.8 67.2 36% 6% 58%
07/05 60.4 69.5 39% 3% 58%
06/05 61.1 61.6 27% 5% 68%
05/05 59.2 62.4 27% 5% 68%
04/05 60.4 64.1 41% 2% 57%
03/05 61.8 65.9 43% 1% 56%
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02/05 60.4 67.0 43% 3% 54%
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01/05 60.3 66.8 37% 4% 59%
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12/04 65.5 71.6 38% 5% 57%
11/04 62.8 70.2 38% 4% 58%
10/04 60.6 70.9 44% 3% 53%
09/04 58.7 66.5 35% 3% 53%
08/04 59.3 70.3 40% 4% 56%
07/04 63.1 71.6 45% 5% 50%
06/04 59.9 74.8 52% 3% 45%
05/04 64.3 77.2 55% 3% 42%
04/04 65.9 68.5 53% 3% 44%
03/04 62.7 64.8 43% 3% 54%
02/04 61.3 58.1 31% 9% 60%
01/04 65.6 60.9 26% 4% 70%
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*Highest reading in the series' history.
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* Following are some comments from the "What Respondents Are Saying" section of last week's ISM service-sector report:
- "Leadtimes on large equipment moving out" (Utilities).
- "Material and equipment prices continue to rise and deliveries lengthen for anything associated with oil and gas drilling, production or construction" (Mining).
- "...Business seems to be picking up and some prices have gone higher recently and some have decreased. We have not seen a significant swing to either side. There is still tremendous pressure to lower our third-party supplier costs to ensure [our] competitiveness" (Business Services).
- "Increased proposal work. Additional work scope on existing projects" (Construction).
- "Labor supply is still tight and prices on construction items high and in short supply -- all effects of [Hurricane] Katrina" (Other Services).
- "Higher activity -- more normal schedule after holidays. Continued increases in emergency room patients, leading to increased admissions" (Health Services).
Commodities Reported in Short Supply During February:
Construction Services; Roofing Shingles(2);Sheetrock/ Wallboard; and Steel/Steel Products.
(NOTE: The number of consecutive months the commodity is listed is indicated after each item.)
Commodities Reported Up in Price During February:
Aluminum (3); Beef* (4); Computers and Related Items; Construction Services; Consultant Services; Conveyor/Rubber Belt Products; Copper (30); Copper Products (various) (4); Copy Paper; Corrugated (4); #2 Diesel Fuel (14); Fuel* (27); Furniture; Gasoline* (27); Heating Fuel; Office Equipment/Furniture; Office Supplies (2); Oil; Packaging Materials; Paper* (25); Paper Products; Paper and Plastic; Petroleum/Petroleum Based Products (2); Plastic Pipe; Roofing Materials (2); Sheetrock/Wallboard; and Steel/Steel Products (3).
Commodities Reported Down in Price During February:
Beef* (2); Chicken; Fuel*; Gasoline* (2); Natural Gas; Paper*; Pork/Pork Products; and PVC/Conduit and Fittings.
*Reported as both up and down in price.
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