On the first business day of every month, the Institute of Supply Management offers its Report on Business. They compile their data by asking purchasing managers at businesses around the country what they think of the economy.
Stock and bond traders tend to closely analyze the report because it is timely, offering an immediate insight into what the front line troops of the economy are seeing.
This report has been compiled since 1948, and was developed by economists looking to forecast the beginnings and ends of recessions. It has a fairly good track record, and is a reliable indicator of how well the economy will do in the next six to nine months.
The headline number summarizes the overall impression of the economy. In May, there was a dramatic drop in the purchasing manager’s opinions of economic growth. While still pointing toward growth, it is a caution flag.
Two comments from managers in the survey summarize the problems.
One noted that “bad weather is impacting retail business.” This is a continuation of the theme seen in many economic reports that one-time factors are causing a slowdown, or in the case of government stimulus programs delivering a distortion to the upside.
Another buyer noted that “business is still strong, but we are more aware of a possible softening than previously.” Consumer confidence has been declining in recent reports, and this type of opinion confirms that sagging confidence can dampen economic growth.
More troubling than the headline number was the New Orders Index, which declined more than 10 percentage points to a reading of 51 in May.
The ISM website notes that “a New Orders Index above 52.1 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders.”
Next month’s report needs to be watched closely for confirmation of this trend.
Overall, this report is one more indicator that the U.S. economy may slow down later this year.
There is some good news. One of the brightest areas of the ISM report was in imports, which showed the smallest decline of any category.
Cheap products from overseas still seem to be a driver of U.S. economic growth.
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