Monday, July 2, 2012

June '12 Manufacturing ISM Update ...

June manufacturing ISM print was 49.7, significantly below the 52.0 consensus (initially, we thought the consensus was at 51.5), and slightly above our 49.0 estimate.  Estimates given by ‘professionals’ ranged between 51.0 and 53.4, according to Econoday.  As a reminder, an ISM figure below 50.0 represents contraction.

Initially, when we looked at the June data and saw continuing decline in inventories, we thought that some inventory replenishment might be in the making in July or August.  However, that decline is accommodated by an increase in customer's inventories, decline in backlog of orders, and a pretty much flat supplier deliveries.

Most components of ISM were disappointing.  New orders dropped to 47.8 from 60.1 a month ago.  Production dipped but remained above the 50 level.  Employment also remained in the expansion level, at 56.6, a decline of 0.3 from previous month.  We note that this data does support our continuing belief that the job market is not improving as strongly as it needs to.  Employment is usually a lagging indicator at the macro level, and we think within the manufacturing space.  In July, we could see the ISM employment series index dip much closer to 50, or even below it.

Prices series index declined to 37.0, from 47.5 in May.  This was not surprising as we have seen commodities take a dump for the past couple of months.  However, lower input prices won't impact production unless there is more certainty regarding demand, which currently there isn't.  This is also related to employment, as lower input costs, combined with demand uncertainty and tighter inventory management, will make it easier to keep headcount low, which means employment in this space will likely not expand in 2H12.

We will finalize our NFP estimate and post it before the close (hopefully!).  By the way, congrats to Spain for winning the 2012 Euro Cup!  Unfortunately, as a reward, Spain's 10-year yield is up 4bps right now, while Italy's is down 8bps.  The winner in the financial and economic arenas is yet to be determined.

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