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Daily Global Commentary

Accumulation of Inventories Major Reason for Increase in June ISM Manufacturing Index

Tue, Jul 1 2008, 21:40 GMT
by Asha Bangalore

Northern Trust

Accumulation of Inventories Major Reason for Increase in June ISM Manufacturing Index

The ISM manufacturing index rose to 50.3 in June from 49.6 in May. Indexes tracking new orders and employment fell, while indexes tracking production (51.5 vs. 51.2 in May), supplier deliveries (55.1 vs. 53.7 in May) and inventories (51.2 vs. 48.0 in May) advanced in June. The largest positive contribution was from inventories, which is probably a reflection of strategies implemented in the likelihood of higher prices in the months ahead. On a quarterly basis, the ISM manufacturing index has held between 49.2 and 49.6 for three quarters.

The production index fell in the second quarter (50.6 vs. 51.5 in the first quarter) and the new orders is virtually unchanged in the first six months of the year.

Among components that are not included in the composite index, the reason for the upward trend of the price index is obviously the upward trend of oil prices. The export index (58.5 in the second quarter vs. 57.0 in Q1) continues to advance, supported by a weak dollar and economic strength of trading partners. The main message is that the 50.2 reading of the composite index in June is not a bullish reading because the strength was largely in inventories and not new orders, which has held steady below 50.0 for seven straight months.

Residential Construction Outlays Maintain Declining Trend

Residential construction spending fell 1.6% in May, after a 1.7% drop in April. The April-May data suggest that residential investment expenditures in GDP are most likely to make a large negative contribution to real GDP in the second quarter, following a 24.6% annualized decline in the first quarter.

Private non-residential spending remained positive with a 0.2% increase in May compared with a 1.6% jump in April.

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Published on  Tue, Jul 1 2008, 21:43 GMT

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