The reading of ISM Manufacturing coming in under 50.0 is signaling that the Chicago Purchasing Managers was not a fluke yesterday, although read the summary about a silver lining at the end here.  This dip is the first time under a 50.0 reading following 41 consecutive months of growth, while the overall economy grew for the 61st consecutive month.  While we have an inverted yield curve and weaking numbers, we still have higher prices and this is still a dilemma for the Fed.  The Fed can’t really justify a hike right now, but they have to keep watching prices to avoid stagflation.

HERE ARE THE READINGS: 49.5 in NOV versus 51.5 estimates and vs. 51.2 for OCT…..ISM 5 of 9 components under 50.0, meaning contraction.

These are 8 sectors still showing positive readings: Apparel, Leather & Allied Products; Plastics & Rubber Products; Primary Metals; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing; Computer & Electronic Products; Printing & Related Support Activities; and Chemical Products.

ISM’s New Orders Index registered 48.7 percent in November, down 3.4 points than the 52.1 percent reported in October (breaks a 42 month gain streak).

What is cautionary is that this shows a drop in NEW ORDERS, a drop in EMPLOYMENT, a drop in SUPPLIER DELIVERIES, and a drop in INVENTORIES. Backlogs are also under 50 for the third month in a row.  Unfortunately the prices pair are still running above the 50.0 barrier (although the Bureau says 47.1 is the b/e mark now).  Exports are still positive at 56.9 (down a tad) and imports grew to 56.6.

Here are additional respondent comments:

    *  "Sales have leveled off, but we will have a record year. Second [year] in a row." (Computer & Electronic Products)
    * "Business has softened in the past 60 days. Down about 20 percent." (Fabricated Metal Products)
    * "Housing market slowed down." (Furniture & Related Products)
    * "We have hit another slow period in receiving new contracts. Quoting activity is fair." (Machinery)
    * "We are still trying to hire new maintenance techs, but find it difficult to find qualified people." (Nonmetallic Mineral Products)

There is actually a silver lining:

The Fed will need to keep rates steady because a really weak economy will hurt the public far more than an extra 0.5% hike in prices.  Bernanke will not want to go into the next administration as being the guy that led us into a recession within a year and a half or two years of taking the helm.  The real way to track this is by watching the 10-year yields rather than stocks, as the bond guys are just better at this game.  The 10-year treasury yield was just under 4.48% (up 2 basis points) before the release, but now the yield has fallen to 4.42%.  That is not indicative of another series of hikes.  Fed fund futures often ratchet around too much in the immediate hours after an economic reading, so for now we’ll leave it alone.

Everyone wanted a goldilocks economy where we still maintain even keel or have a slight change either way with strong employment.  This may actually be it and a soft landing so far doesn’t look or feel like a real thud based on these weaker numbers yet.  The forward numbers (new orders) are somewhat offset by lower inventories, so right now you have the wait and see game still being played.

Jon C. Ogg
December 1, 2006

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