As today’s bankruptcy filing by GM looms large in the news, I wanted to take a moment to discuss today’s report on manufacturing. The closely-followed ISM Manufacturing Index contracted at a slower pace for the fifth-consecutive month and rose from 40.1 in April to 42.8 in May. A reading of 50 marks the line between expansion and contraction.
What is particularly pleasing, in my view and another sign the economy is near a bottom, is a rise in new orders from 47.2 to 51.1, the first increase above 50 in 17 months.
Production and exports contracted at a slower pace but employment continues to languish, remaining nearly unchanged at 34.3. Unfortunately, improvement in the labor market lags a recovery.
Inflation still isn’t an issue but I believe it’s noteworthy to point out that the prices paid component rose from 32.0 to 43.5. One has to believe the bond market is paying close attention given recent weakness (Bailing Out of Bonds). The subcomponent had bottomed below 20 last year.
The contraction in manufacturing has been particularly swift, with industrial production falling at an annual pace of 20% in the first three months of 2009 as demand around the world collapsed. As inventories shrink and slowly lineup with demand, we should continue to see incremental improvements in manufacturing.
Stocks are reacting favorably as investors pile into stocks and ignore news of GM's Chapter 11 filing, which had already been discounted.
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