Digging Down: ISM Not as Strong as It Appears

While all the algos are scanning the ISM general business conditions headline, the New Orders Less Inventories spread, which leads the broader index by 3 months, has tumbled and the divergence between it and the ISM Composite is now at near record wide levels. The last time this spread closed in a favorable fashion was back in 2010, when QE1 and 2 goosed the market and the general manufacturing space. This time around, in the absence of another stimulus, the spread will close again all right, but not the way it did last time around, and explains why an ISM analyst just said new orders "not where we'd like it to be." The sub 50 ISM print is coming. Just not this month.

 

When even Goldman is downplaying the end all report which is certainly not all it is being touted to be, there is little that can be added:

BOTTOM LINE: The ISM beats expectations and rises in June. The details of the report, however, were weaker than the headline as more than half of the headline increase was due to an increase in inventories

The Institute for Supply Management (ISM) rises unexpectedly in June, up 1.8 points to 55.3. As the median forecast and ourselves had looked for a decline, this is clearly an encouraging upside surprise. The composition of the report, however, was on the weaker side. Specifically, a sharp increase in the inventories index (from 48.7 to 54.1) explained 1.1 points of the 1.8 increase in the headline index. If anything, an increase in inventories is a negative for future activity. The remaining 0.7 point of the headline increase was due to small increases in new orders (by 0.6 point to 51.6), production (by 0.5 point to 54.5), supplier deliveries (0.6 point to 56.3) as well as a more sizable increase in employment (1.7 points to 59.9).