Monday, November 3, 2008

Another Bad Number


The Lehmann Letter ©

Today the Institute for Supply Management reported its October Purchasing Managers’ Index at 38.9 (

Norbert J. Ore, the Institute’s chair, said: "The PMI indicates a significantly faster rate of decline in manufacturing when comparing October to September. It appears that manufacturing is experiencing significant demand destruction as a result of recent events, with members indicating challenges associated with the financial crisis, interruptions from the Gulf hurricane, and the lagging impact from higher oil prices. This is the lowest level for the PMI since September 1982 when it registered 38.8 percent. In this report, we see inflationary pressures dissolving as the Prices Index fell to 37 percent, the lowest since December 2001 when it registered 33.2 percent. Export orders also contracted for the first time following 70 months of growth."

Pay attention: ‘….. significantly faster rate of decline...,” “ significant demand destruction…,” “…”inflationary pressures dissolving…,” “…Export orders also contracted for the first time following 70 months of growth."

And then look again at that number – 38.9 – and use it to update the chart.

Purchasing Managers’ Index

(Click on chart to enlarge)

Recessions shaded

We’re down to levels not seen since the 1981-82 recession. That’s bad.

But it will get worse. Manufacturing has only just begun its hard contraction. So far it’s been slipping. Now the sliding starts. As purchases of consumer durables (think autos) and nondurables (such as apparel) plunge in the fourth quarter, manufacturing activity will shrink.

How do we know? Check out the October 28 blog, Blue Christmas, at
Consumer confidence has fallen to its lowest recorded post-WWII level. Consumers won’t spend under those conditions, and manufacturers’ markets will consequently dry up.

And why should businesses invest in new capacity under these circumstances? That’s another weak spot for manufacturing.

Then scroll back up to see what Mr. Ore said about exports: “…Export orders also contracted for the first time following 70 months of growth." The rest of the world can’t buy our goods when their economies are shrinking and the dollar is stronger.

Finally, what about Mr. Ore’s comment that “…”inflationary pressures (are) dissolving….” Isn’t that a silver lining? Sorry, that’s just further confirmation that demand is weak.

The bottom line: Things are bad and getting worse.

(The chart was taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2008 Michael B. Lehmann

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