ISM: ECONOMISTS REACT

A smattering of analyst opinions on this morning’s data:

• Much stronger than expected report. The composite index rose to its best level since June 2007 with considerable gains in orders, production and vendor deliveries. […]The improvement in the manufacturing sector broadened out somewhat in August, with 11 of the 18 industry groupings reporting growth. This compares with six industries showing growth in July and seven in June. The August gains were led by sectors such as textile, paper, electronics, transportation equipment and chemicals. Clearly, this is more than just an auto story. –-David Greenlaw, Morgan Stanley



• The August ISM report shot the lights out in terms of broad-based gains across all key indicators. The production index has accelerated for three consecutive months, indicating that recent positive developments in auto sales and residential construction are definitely adding considerable upward momentum to the manufacturing sector. […] Overseas orders have rebounded in the past several months with a distinct V-shaped pattern, indicating that the global economy is picking up considerable momentum. –-Brian Bethune, IHS Global Insight
• Manufacturing is expanding, according the Institute for Supply Management.  Its August activity index broke over the magical 50 level, indicating that growth had resumed.  And it wasn’t just the motor vehicle sector.  […] The new orders index hit its highest level since the end of 2004. This is a favorite report for many at the Fed and if the members start believing the recovery story is real, then the decision to raise rates will not be too far behind. My guess for the first increase in rates remains either the December meeting or the end of January 2010 meeting. –-Joel Naroff, Naroff Economic Advisors
• The mix of surging new orders and plunging inventories suggests that the increase in activity is sustainable. Factories continued to shed inventories at a rapid pace. The 34.4 reading for August was up less than a point and remains close to the multi-decade low of 30.8 seen in June (until a few months ago, the index had not below 37 since the early 1980s). Moreover, the customer inventories measure slid by 3 1/2 points to 39.0, signaling that an increasing proportion of purchasing managers think their customers’ stocks are too low. This reading was the lowest since July 2004 and the 34% who felt that their customers’ stocks were too lean was the highest on record going back to 2001. […]It may take a few more months, but we remain confident that this recovery will have legs, and the data over the last month or so have done nothing but bolster our confidence that 2010 will see economic growth that is well above trend. –-Stephen Stanley, RBS Capital
• The ISM report…concurs with our view that the long, severe manufacturing recession has bottomed out. Manufacturing activity in this early stage of the recovery is being driven by a classic inventory swing—particularly in the automotive sector.  It is less that inventories are being added as it is that firms are not destocking.  Production, therefore, has to rise as fewer products and materials come out of inventories. –-Daniel Meckstroth, Manufacturers Alliance/MAPI
• After the initial inventory-led boost, a key element going forward will be whether final demand picks up sufficiently to keep the upward impetus in place, or whether momentum will wane once inventories are stabilized. Much will depend on the consumer, and, apart from a very near-term bounce from the “cash for clunkers” program, we feel that the headwinds for consumer spending remain too brisk to expect much help on this front. –-Joshua Shapiro, MFR Inc.
• The prices paid index jumped 7.2 points to 65.0, a surprising move in the face of oil price changes that — while positive — did not depart sharply to the upside in August. The supplier deliveries index also rose 5.1 points to 57.1. These developments suggest the potential for some price pressure in the production pipeline; however, with utilization rates near post Depression lows, we do not expect this to manifest itself in finished goods or retail prices. –-Goldman Sachs

Source: WSJ