June's ISM

The June ISM fell back below 50%.  The index is a diffusion index, which measures what percentage of respondents have sales/production/orders up and what percentage have them down.  So going below 50% is a sign that in the manufacturing sector, activity is now going backwards.  New orders are contracting, export orders are contracting ....  This is pretty much what the average of the Fed regional PMIs pointed to.

The chart below shows the seasonally adjusted data (supplied by the ISM) and the extreme-adjusted data (calculated by me).  Extreme adjustment is designed to reduce large random fluctuations in the data.  Trouble is, it's not 100% reliable at the end of a time series, because the algorithm doesn't "know" what the next months' observation is.  If that is also low, then it will decide that two low numbers in a row are a no longer random fluctuations, but the beginning of a trend.  Just the sort of issue we have to wrestle with as investors.

And the underlying question is whether the decline in all these indices is simple "payback" for unseasonably warm weather earlier in the year, or whether it is a sign of a more serious, "real" slowdown.  But ... the decline in export orders has nothing to do with US weather.  And that is concerning.  Even simple "payback" does carry the risk of tipping a weak economy back into recession.  Add European recession, a Chinese slowdown and the "fiscal cliff"  and the risks increase.

Click on chart to enlarge