LEADING INDICATORS IN ISM CONTINUE TO DETERIORATE
Despite a positive headline figure the leading indicators in the ISM Manufacturing index continue to deteriorate (via Econoday);
“New orders are decelerating, and perhaps abruptly, while inventories climb and hiring slows. The ISM’s new orders index, in prior months having already showed signs of slowing, fell two full points to 51.1 to indicate only mild month-to-month growth. Inventories, which had already been going up, really spiked, up more than four points to 55.6. This will raise concern that a significant part of the inventory build is more and more unwanted. Employment, which had been very strong, fell nearly four points to 56.5.
Backlogs are another bad sign, falling five points and showing month-to-month contraction at 46.5. The headline composite of 54.4 is still solid but orders are now a central concern for the manufacturing outlook. This report may prove to be a negative for today’s stock market.”
The most interesting part of this report isn’t even mentioned in this summary. Prices spiked from 61.5 to 70.5. It looks like higher commodities are starting to become a problem. All these $90-$110 earnings estimates for 2011-12 are predicated on a continuation of record margins. If companies can’t raise prices, and I doubt they can, these estimated will have to keep coming down.
The number did come in around expected which will keep the majority thinking that slow growth is ahead. If economic numbers continue to signal slow growth, will the Fed hold off on QE2? Right now they are signaling it’s a done deal but there are many good reasons to have reservations. (Just trying to think one step ahead.) Will the signaling change?
Mike: perhaps not so much the FED messaging will change, but these mixed signals will make it tough for companies to forecast Q4 numbers, this month. The only thing that is a tailwind for a large US business now is the FED killing the dollar: it boosts international sales. Current inflation in commodities will find its way up in earnings reports, and unless there are general price hikes it will impact profits. Governments are starting austerity measures, so public spending is going to be a mixed bag as well. Am bullish on the long term, but short and medium term, with expected next year earnings around $90 (an all time record I think), it’s going to be a tough bar to clear.
We’ll see…