The markets popped this morning after the ISM Purchasing Manufacturers Index (PMI) was released. However, as always, we must dig below the headline numbers to see what the real story is.
A build in inventories overstated the strength in what really was a less than exciting report for June. Most likely this number will be transitory and July’s number could very well be pushed lower. The headline number came in at 55.3 which was higher than the 53.5 level from May but still well below the peak 61.2 that was witnessed in March. The headline number is a composite of 5 equally weighted sub-indexes with inventories jumping more than 5 points to 54.1. That push was most likely due to the restocking of inventories after the drought from Japan which begs the question that since they seem to primarily be back online what is going to drive the index next month – which brings us back full circle to the lack of domestic fundamental demand which is the real driver of the economy.
The other sub-indexes can answer some of that question for us. New orders showed only a very slight month-to-month increase of 0.6 points moving its index from 51 to 51.6. Backorders showed a contraction to 49 versus 50.5 in May and, the biggie, Exports, slowed in June dropping to 53.5 from 55 last month. All in all – demand is non-existent which is the big concern going forward with the lack of government stimulus leading the charge.
Pricing pressures also remained at severe levels in the report which still brings us a relative amount of concern heading into earnings season as there may be a direct impact to corporate profit margins if these higher costs were not able to be passed through. Since analysts have not lowered expectations for corporate earnings to reflect such a potential event even a mild hit can cause a fairly large pricing adjustment in the stock market.
Overall the report, while pushing the market higher, did not offer any real encouragement that the economy was showing any real signs of organic recovery. In reality, we may have just witnessed a one month bump in inventory restocking. The ISM Non-Manufacturing Index next week will give us more clues. We want to pay attention to these reports as there is a very high correlation between the Year-Over-Year changes in the ISM and the S&P 500 as shown in the chart.