ISM–Headline and Employment Suggest GrowthAfter three months of sub-breakeven readings in the ISM index it was a relief to see modest gains in the production and employment components of the ISM survey. Production rose to 49.5 with gains reported in printing, food & beverages, apparel, paper and fabricated metals. As illustrated in the top graph, this month’s headline reading of 51.5 provides a welcome offset to the rapid drop in the ISM index and orders reports over the past six months. Our outlook for industrial production is at 0.6 percent for the second half of this year compared to 4.3 percent in the first half—a slowdown but not a recession.
On the pricing front, we do see some pricing pressures. In September, the prices paid index rose to 58.0 from 54.0 the prior month. Industries reporting paying higher prices include food & beverages, printing, chemicals, machinery and fabricated metals. Commodities up in price include corn, corn products, corrugated boxes, fuel and caustic soda, which is used in paper, textiles soaps and detergents.
New Orders and Capital SpendingNew orders came in at 52.3 after three straight months of sub-50 readings. Industries reporting a gain in new orders were petroleum, apparel, food & beverage, furniture, paper and fabricated metals. The gain in new orders is reassuring since in recent months orders for non-defense capital goods ex-aircraft have declined sharply (middle graph).
Orders are a leading indicator of overall economic growth and a continued decline in new orders would have raised the recession alert for the overall economy. Our outlook is that equipment & software spending for the second half of 2012 will show slower growth of 2.6 percent compared to 5.1 percent in the first half of this year.
A Disconnect Between the Employment Index and JobsThe employment component of the ISM survey came in at 54.7 and has been above breakeven all year. Industries reporting growth in jobs include printing, food & beverage, paper, furniture and fabricated metals. While the ISM index has been fairly healthy during the current expansion, the actual gain in manufacturing jobs has been far weaker than consistent with the ISM index.
Structural change continues to dictate that gains in the ISM survey and industrial production tend to be associated with greater equipment & software spending and thereby productivity gains, and less with actually adding workers. Moreover, the type of manufacturing worker added has increasingly been the worker with the ability to process information and work with computers. As manufacturing has become more capital intensive over the years, hiring in recoveries has been more muted than in prior cycles—this is a long-term change that we expect to persist.