ISM Factory Sector Index ReachesIts Highest Level In Nearly One Year

Though overall activity declined again last month, the recession in the factory sector continued to moderate, according to The National Association of Purchasing Management. Its July composite index rose to 48.9 from an unrevised June reading of 44.8 and reached it's highest level since August of last year. The August figure was up from the low of 32.9 hit last December. (Any reading below the break-even point of 50 suggests declining activity.) The July figure about matched Consensus expectations. The ISM data is available in Haver's USECON database.

Improvement in the components of the overall June ISM index again was broad-based. The production component surged to 57.9, up from the low of 26.3 in December, and was at its highest since June of 2007. During the last ten years there has been an 84% correlation between the level of the production component of the composite index and the three-month growth in factory sector industrial production. It is appropriate to correlate the ISM index level with factory sector output growth because the ISM index is a diffusion index. It measures growth by using all of the positive changes in activity added to one half of the zero change in activity measures.· The new orders figure also jumped sharply to the highest level in nearly two years. At 55.3 it was up from the December low of 23.1. Suggesting some stabilization in the recessions abroad was a modest rise in the export order index to 50.5 versus the December low of 35.5. During the last ten years there has been a 53% correlation between the index and the q/q change in real exports of goods in the GDP accounts.

Factory sector improvement also was indicated by a rise in the employment index. The jump to 45.6 was to its highest level since last August and that was up from the February low of 26.1. During the last ten years there has been a 90% correlation between the index level and the three-month change in manufacturing payrolls.

The rate of inventory destocking picked finally may have stabilized as indicated by a modest rise in the inventory index to 33.5. It still was near the lowest level since 1982. That improvement brought with it another decline in the speed of supplier deliveries. At 52.0, the vendor performance index rose for the fourth consecutive month to its highest level in one year.

The separate index of prices paid again rose with improved factory sector activity levels. At 55.0, the reading above the break-even level of 50 was its highest since last August and it's up from the December low of 18.0. During the last twenty years there has been a 79% correlation between the price index and the three-month change in the PPI for intermediate goods.

Below The Line: Estimates of Negative Equity Among Nonprime Mortgage Borrowers from the Federal Reserve Bank of New York can be found here. 

It's been a long time coming, but a bottoming of the two-year decline in construction outlays arrived in 2008. During June, the value of overall construction put-in-place ticked up 0.3% after a little-revised 0.8% May slip, and the latest beat expectations for a 0.5% decline. More to the point, however, was that outlays through June versus January fell just 2.1% (AR) versus the 9.9% three-month rate of decline through January.

Private nonresidential building outlays continued to support overall construction activity. Though the monthly increases so far this year have been small, the gains versus January lead to an 8.6% annual rate of growth and that reverses the decline through the beginning of this year.Spending in virtually all sectors has turned positive, notably in the education, health care and transportation areas. The rate of decline in office construction also has moderated but still is quite negative.

The best that can be pointed out about residential building activity is that there was a 0.5% uptick in June, but that only lessened the negative growth rate this year to -25.9%, half that at its worst. Single-family home construction is down by nearly half from its January level while multi-family construction fell the same 7% it did did in May (-33.1% y/y).Spending on improvements reversed all of a 1.2% May decline and have risen at a 12.3% annual rate since January.

Public construction activity was firm again during June and the 1.0% gain lifted spending since January at quite-strong 17.9% rate since January. The increase has been led by strong gains in the heath care (24.0% y/y), educational (4.6% y/y) and transportation (+1.0% y/y) areas.

The construction put-in-place figures are available in Haver's USECON database.

The FACT: German ex-auto retail sales fell sharply in June, the second sharp drop in a row after posting a strong gain in April.

THE REVERSAL: After a terrible January German non-auto retail sales have been on a nice strong recovery path as sales cut their decline of over 1% (m/m) in January to drop of -0.2% in February then rose in March and rose strongly in April by 1.8%. That was before this new episode in which they have posted back to back large drops in May and in June.

THE IMPACT: Despite the disappointing numbers in the last two months, earlier increases will hold retail sales ex-autos flat in real terms; the nominal numbers will rise by 1.7% at an annual rate in Q2.

THE PARADOX: The retail sales report was a bitter one for June and it comes in a day that Europe-wide and German MFG PMI results we better-than-expected. The EMU report registered its second highest month-to-month gain in its relatively modest history- still an impressive jump. The German MFG reading rose to 45.7 on its largest point gain ever, reaching a ten-month high, although still indicating a declining state. All of that is impressive.

THE UPSHOT: So the day’s reports are mixed. In Europe and in Germany manufacturing is making a strong step toward recovery. Still, the level of the reading tells us that the strong month-to-month improvement leaves industry output contracting. The retailing sector that had begun to look like it was in a state of repair is now looking much worse. While the quarter will not end too badly for German retail sales that is because of past strength. The recent collapse in retail sales should be a warning to policymakers about complacency – even in the face of a manufacturing turnaround that is in progress.

THE FUTURE: The new bout of retail weakness puts retail sales in a deep hole from which to start off in 2009-Q3. For example if German retail sales do not rise in July they will carry a growth rate off the previous quarter of -6.4% at annual rate in Q3 over Q2. This is a big inherited weakness that is unlikely to spur any increase in the output of consumer goods in Germany – setting aside the auto sector where special incentives are having a positive impact. The optimistic spin here is that all of consumer attention is going into the auto incentives and that is leaving other retail behind. Things may not be as weak as they seem by looking at non-auto retail sales alone. That may be true, but that is only a matter of solace if attention and spending in the non-auto sector turns up, because it is starting off Q3 in a really deep hole. The auto sales revival in Q2 will only make it that much more difficult to get Q3 sales higher. In other words if the auto incentives don’t stay in place and do not continue to have a strong positive impact, German overall retail sales will become a heavy negative weight on German GDP in Q3.

Cash earnings, including bonuses, for Japanese workers in all establishments of 5 or more persons were 430,620 Yen (approximately $4,500) in June, 8% below a year ago. The sharp decline was due to lower bonuses and less overtime pay. The average bonus in June of this year was 167,044 yen compared with 197,226 yen last June, a decline of more than 15%. Overtime pay was 15,725 yen compared with 19,275 yen a year ago, a decline of 18.42% and, although the decline was small, even base pay declined 1.4% to 247,851 yen from 251,437 yen a year ago.

Cash earnings in the manufacturing industry in establishments of 5 or more persons were down over 13% in June. Again, bonuses were the major cause of the decline. Bonuses in Manufacturing were 155,298 yen in June 2009, compared with 209,309 yen in June 2008, a drop of almost 40%. In contrast to industry as a whole, manufacturing saw an increase in base pay of 1.5% and an increase of 5.7% in overtime from May to June.

Total cash wages for all surveyed industries and for manufacturing are shown in the attached chart.

The U.S. government's "Cash for Clunkers" program was given credit for supporting sales of light vehicles last month. The program gives car buyers up to $4,500 for trading in older, gas-guzzling vehicles if they're buying more fuel efficient cars. The Treasury Dept. was authorized to spend $1 billion and an additional $2 billion currently is under consideration by the Senate. The House passed its approval of the plan on Friday. One estimate is that, just last week, the program helped spike vehicle sales to a 15-to-16 million annual rate. Regardless of the program's impact, U.S. light vehicle sales last month jumped 15.8% from June to 11.24 million units (AR) which was the highest sales rate since last September. It followed a 1.6% decline during June. While sales were firm last month, they remained down by nearly one-third, year-to-date, from the first seven months of 2008. (Benchmark revisions altered sales levels slightly back to 2002.)

Unit sales of U.S. made light vehicles jumped 15.8% m/m to 8.17M units during July which was their highest since last September, according to the Autodata Corporation. (Seasonal adjustment of the figures is provided by the U.S. Bureau of Economic Analysis). Sales of domestically made cars jumped 25.4% m/m to 4.11M units while light truck sales rose 7.4% m/m to 4.06M units. YTD, sales of domestic vehicles overall are down 33.6% following last year's 35.8% drop from December-to-December.

In similar fashion, sales of imported light vehicles were strong and rose 16.0% m/m during July from June. Sales of imported autos rose 18.3% from June and were at their highest level since last August. Sales of imported light trucks were nearly as strong m/m, up 11.3% from June, but they've really been strong all year rising to their highest just since March. Sales of imported vehicles YTD have increased 12.5%.

Overall, import's share of the U.S. light vehicle market held steady at 27.3% last month after reaching 26.5% during all of last year. (Imported vehicles are those produced outside the United States.) Imports' share of the U.S. car market totaled 33.7% while the share of the light truck market was 19.5%, up slightly from last year.

The U.S. vehicle sales figures can be found in Haver's USECON database.