Summary
Last Thursday and yesterday, the Institute for Supply Management released respective May results for its manufacturing and its service-sector indexes. While both measures weakened in May overall, each registered an additional sizable increase in its price component. In both instances, these already were high by historical standards.
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Foreword
Tomorrow morning, colleague, John Williams, will publish the June edition of "Shadow Government Statistics," which makes this a highly appropriate time to restate and emphasize the following. To wit:
The frequent and growing lack of sensibility associated with much of the critical economic data coming out of various government agencies places increased importance on sound numbers from private-sector sources. In this regard, John and I view the monthly data 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.
ISM's sound long-term record and reputation, coupled with the very broad spectrum of economic activity covered by its two monthly releases, account for why I spend as much time as I do each month examining these reports.
The above said, ISM employs seasonal-adjustment factors developed each year by the Commerce Department. There have been times this year when it appeared to me like these seasonals might be creating distortions, ones also showing up in other series in which the same Commerce Department factors were used (GDP, for instance).
It is possible that in combination with a warmer-than-normal winter in many areas, during January in particular, these distortions may have
overstated economic activity earlier in 2006. If this is the case, these seasonal-adjustment factors should reverse and head in the other direction as the year progresses, as appears possibly in progress.
Over an accounting/seasonal-adjustment cycle (generally a 12-month calendar year), these factors should balance out -- unless, of course, the Commerce Department were arbitrarily to changes its statistical criteria. Commerce shouldn't do this, of course, but it is an election year and at the moment, the President's popularity is in the toilet!
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General Observations
* Last Thursday (6/1), the Institute for Supply Management reported that its index designed to measure the economy's manufacturing activity ("PMI") fell in May, to 54.4. This was materially weaker than April's reading of 57.3.
* May's softening was clearly evident in some of the index's more important components. One exception was the price component, which registered another large increase.
* The overall May result was worse than a consensus estimate that had been looking for something around 55.7.
* Yesterday, (6/5), ISM released results for its May service-sector index. The index fell to a reading of 60.1 in May, down about 4.6% from April's 63.0
* The May service-sector result came in virtually at the consensus forecast that was looking for 60.0.
(NOTE: Overall index and sub-index readings above 50.0 indicate expansion; readings below 50.0 indicate contraction.)
As mentioned earlier, 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 they possibly represent a weak link regarding ISM data.
May ISM Manufacturing Data
* ISM's May PMI came in at 54.4, versus April's reading of 57.3.
* In May of 2005, the PMI stood at 51.8, 2.6 points or 4.8% below the latest result. However, last May's reading not only was the low point for all of 2005, it also was the lowest reading since the 50.5 that was recorded in June of 2003.
* The May 2006 result was 1.0+ points below a consensus estimate had been looking for something around 55.7.
* The prices-paid component registered a sizable 5.5-point, 7.7% increase during May, to 77.0, representing a level decidedly on the high side by historical standards. Moreover, during the last three months, the price component rose 14.5 points or more than 23%. As of May, it stood 28.5 points or a very substantial 58.8% above its recent low, which was 48.5 and was set last July.
* The May performance of selected components:
Change Direction ROC@
------ ------------ ----
Prices Paid 5.5 to 77.0 Increasing F
Supplier Deliveries -0.1 to 57.6 Slowing S
Employment -2.9 to 52.9 Growing S
Production -3.2 to 57.2 Growing S
Inventories -3.3 to 48.0 Contracting #
New Orders -3.9 to 53.7 Growing S
Backlog of Orders -4.0 to 53.0 Growing S
@Rate of change: S = slower, F = faster.
#This series had been expanding.
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* Per ISM, following were the eight best performing industries during May (in order):
(1) Miscellaneous; (2) Industrial & Commercial Equipment & Computers; Primary Metals; (3) Tobacco; ( 4) Apparel; (5) Instruments & Photographic Equipment; (6) Paper; (7) Food; (8) Chemicals.
* Some comments from ISM's "What Respondents Are Saying" section of last week's report:
- "Fuel surcharges now up to 19.8%" (Transportation & Equipment).
- "Continued concerns regarding inflation, centered around the extreme high price of crude oil and related energy products" (Chemicals).
- "Current estimates are that the Yuan will appreciate 5-15%, thus increasing prices for products supplied out of China" (Rubber & Plastic Products).
- "Commodity prices are at record high levels and many are going on allocation" (Fabricated Metals).
* Over the 12-month period ended May, the overall PMI registered a high of 58.1 (October 2005). Its low of 53.5 was set last August. The 12-month average came in at 55.9, 1.5 points or 2.8% above May's result. The highest reading since January 2003 was 63.1 (occurring in December of 2003), 8.7 points or almost 16% above May's reading.
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INSTITUTE FOR SUPPLY MANAGEMENT PMI INDEX
-- TOTAL INDEX AND PRICE COMPONENT
--------------------------------------------
Respondents Reporting
Higher, Lower, or
Unchanged Prices
Month/ Overall Price ---------------------
Year Index Index Higher Lower Unch.
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05/06 54.4 77.0 56% 2% 42%
04/06 57.3 71.5 53% 10% 37%
03/06 55.2 66.5 42% 9% 49%
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%
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05/05 51.8 58.0 32% 16% 52%
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04/05 53.8 71.0 52% 10% 38%
03/05 55.3 73.0 51% 5% 44%
02/05 55.6 65.5 38% 7% 55%
01/05 56.3 69.0 45% 7% 48%
==========================================
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 May:
(NOTE: The number of consecutive months the commodity is listed is indicated after each item.)
Particle Board; Stainless Steel; and Steel (2).
Commodities Reported Up in Price During May:
Aluminum (10); Aluminum Products (6); Brass (2); Chemicals (2); Copper (12); Copper Products (6); Corrugated Containers (7); Diesel Fuel (2); Ferrous Scrap; Flour; Freight (3); Gasoline (2); Linerboard; Nickel (2); Paper (5); Particle Board (3); Plastics (2); Plastic Resins (2); Silver (2); Stainless Steel; Steel (3); Steel (Hot Rolled); and Zinc (2).
Commodities Reported Down in Price During May:
Caustic Soda (3) and Natural Gas (5).
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May ISM Non-Manufacturing Data
* Yesterday (6/5), ISM released May results for its service-sector index. Per the ISM report, the index fell to a reading of 60.1 in May, down about 4.6% from April's 63.0.
* The May result came in virtually at the consensus forecast that was looking for 60.0.
* In May of 2005, ISM's service-sector index stood at 59.2, 0.9 points or 1.5% below the latest result.
* The May performance of selected components:
Change Direction ROC@
------ ----------- ----
Prices Paid 7.0 to 77.5 Increasing F
Supplier Deliveries 2.0 to 56.5 Slowing F
Employment 1.5 to 58.0 Increasing F
Inventories 0.0 to 59.0 Increasing #
Backlog of Orders -2.0 to 52.0 Increasing S
New Orders -5.0 to 59.6 Increasing S
@Rate of change: S = slower, F = faster, # = unch.
-----------------------------------------------------
(NOTE: Overall index and sub-index readings above 50.0 indicate expansion; readings below 50.0 indicate contraction.)
* During May of 2006, the prices-paid component rose to 77.5, a spurt of seven points or 9.9% from April's 70.5. It marked the 49th consecutive month of rising prices.
* At 77.5, the May price component was only slightly below the 78.4 reading this series set in September of last year. In turn, the September 2005 number was the highest price reading in the history of the overall service-sector index (inception in July of 1997).
* From its recent low of 60.5 in March, the price component has risen 17 points or more than 28%.
* The price pressures evident in the May service-sector data join those reported by ISM in its May manufacturing release, as indicated earlier in this missive.
* For the 12 months ended May, the service-sector index's high was 64.8 (August 2005); its low was 53.7 (September 2005). The 12-month average through May was 60.0, 0.1 point or about 0.2% below the May 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 May 2006's result.
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INSTITUTE FOR SUPPLY MANAGEMENT
NON-MANUFACTURING INDEX -- TOTAL
INDEX AND PRICE COMPONENT
--------------------------------------------
Respondents Reporting
Higher, Lower, or
Unchanged Prices
Month/ Overall Price ---------------------
Year Index Index Higher Lower Unch.
--------------------------------------------
05/06 60.1 77.5 54% 3% 43%
04/06 63.0 70.5 54% 2% 44%
03/06 60.5 60.5 36% 6% 58%
02/06 60.1 64.8 39% 4% 57%
01/06 56.8 67.2 37% 4% 59%
==========================================
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%
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05/05 59.2 62.4 27% 5% 68%
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04/05 60.4 64.1 41% 2% 57%
03/05 61.8 65.9 43% 1% 56%
02/05 60.4 67.0 43% 3% 54%
01/05 60.3 66.8 37% 4% 59%
==========================================
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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* Per ISM, following were the eight best performing industries during May (in order): (1) Agriculture; (2) Communication; (3) Utilities; (4) Health Services; (5) Mining; (6) Construction; (7) Insurance; and (8) Wholesale Trade.
* The three industries reporting decreased activity from April to May were: (1) Entertainment; (2) Finance & Banking; and (3) Business Services.
(NOTE: Legal Services was the sole industry indicating unchanged activity during May.)
* Following are some comments from the "What Respondents Are Saying" section of yesterday's service-sector report:
- "Concern about rising fuel cost" (Communication).
- "Coal mining sales remain very high and should hold for long term" (Mining).
- "High energy cost and interest rates affect savings and loans" (Finance & Banking).
- "Energy continues to have a negative impact on goods and services, specifically transportation costs" (Retail Trade).
- "Beginning to see price increase requests due to oil, copper [and] other metals increasing" (Wholesale Trade).
Commodities Reported in Short Supply During May:
(NOTE: The number of consecutive months the commodity is listed is indicated after each item.)
Aluminum; Cement; Copper Wire; Doors; Drywall (4); Steel (4); and Tires (2).
Commodities Reported Up in Price During May:
Air Fares (3); Aluminum (6); Aluminum Products (various); Asphalt (2); Asphalt Products (2); Cement; Concrete; Construction (2); Construction Materials; Copper (33); Copper Products (various) (7); Copy Paper (4); Delivery Costs; #1 Diesel Fuel (3); #2 Diesel Fuel (17); Electrical Components; Energy (3); Freight/Shipping/ Transportation Costs (3); Fuel (30); Gasoline (30); Gas Surcharge; #2 Heating Oil (2); Lumber; Natural Gas (2)*; Office/Computer Supplies; Paper (28); Paper (cut size) (3); Paper Products (4); Petroleum/Petroleum Based Products (5); Plastic Products (various); Plastics; Roofing Materials (2); Steel (4); Steel Products (various); Temporary Labor; Transformers; Unleaded Gasoline (2); and Wire (2).
Commodities Reported Down in Price During May:
Natural Gas (2)* and Stretch Wrap.
*Reported as both up and down in price.
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