New ISM numbers

December 2009 Report: Click Here.

The PMI is up 2.3% to stand at 55.9, the highest level since 2006. This suggests that the economy is growing, and has been for the last 8 months.

Good news: New orders +5.2, Supplier deliveries +1.1, Production +0.9, Employment +1.2, Inventories +2.1, Prices +6.5,

Bad News: Consumer Inventories -2, Prices +6.5

Growth in the PMI reports that 55.9 of responses were favorable. To my knowledge, this report does not count non-responses, that is, companies that went out of business. This suggests that the companies that are still in business are doing much better than in previous months.

New orders are the most important stats for manufacturers, since that will lead to increased production down the road. This huge spike will be hard to follow in upcoming releases and there are a couple of reasons for it.

1. Restocking, we have talked about this before and maybe finally it is happening.

2. Consumer spending increases, increase in domestic consumption.

3. Export led boom. American goods are being shipped overseas.

For our interests here in the Inland Empire, one stat that does not get talked about is delivery times. Basically, 16% of respondents reported slower delivery times, and 6% reported faster delivery times. Slower is better for 2 reasons:

1. There is greater demand for products and it takes longer for these products to be secured and shipped.

2. This demand for product shipment will lead to favorable conditions for the nations carriers.

Now for the bad news: Customer's Inventories are still low. This may mean that inventories are still shrinking at the highest consumer demand months in the year. Silver lining: low inventories will be restocked in the future, but it kills the restocking argument in our increased new orders case. This suggests that the entire supply chain is lean and risk adverse, retailers do not want to stock what manufacturers are making. This is bad news for the Inland Empire, since we are basically the storage unit for Southern California and the Western United States. If consumers were buying goods, then retailers would not want to be caught with their pants down so they would be forced to restock, then this number would be going up. This kills the #2 argument in our new orders case. American consumers are not purchasing tons of goods.

Which leads us to the third and final piece: Prices. Prices increased a scary +6.5. This is good, right? Increased demand leads to increased prices ... except when inflation is caused by some other source. What sources may you ask?

1. Monetary expansion (inflation being a monetary phenomenon)

2. Supply shock (drop in aggregate supply due to unforeseen circumstances)

If raw materials are purchased on a world market with low transaction costs, and the demand for American dollars declines, (a weak American dollar) goods would seem more expensive for Americans, but cheaper for foreigners. This supports the third case for increased orders, increased exports.