ISM Up Again, Reaches 48.9

The ISM manufacturing PMI reached 48.9 in July, its highest level since last October. The index improved for the 7th consecutive month.

Though the headline number still suggests contraction within the manufacturing sector, July's reading is equivalent to 2.4% GDP growth. More importantly, both the New Orders and Production components signaled expansion. Much of the improvement was reported by respondents in the Mineral Products, Paper Products and Printing & Related Support Activities industry groups.

Stocks jumped higher after the report. While I will agree that the report is good news, I would counter that it was not unexpected. The pace of economic contraction has been slowing and today's report supports the presumption that we will see economic growth during the second-half of the year.

The question now is what kind of growth? I remain convinced that we will see a recovery that won't feel like a recovery to many Americans. Not only will unemployment continue to rise, but many CFOs are likely to be reluctant to allow a significant increase in spending.

Even the responses listed in the ISM report were cautious:

"[There is concern about] overall health of strategic suppliers - continue to see new suppliers filing Chapter 7 or 11, posing significant risk to supply chain." (Machinery)

"While our aftermarket business has improved slightly, we are still awaiting an increase in OEM demand." (Transportation Equipment)

"Looking at another round of shutdowns to align supply with projected demands." (Nonmetallic Mineral Products)

Similarly, many CEOs cast doubt on a V-shape recovery occurring in the second-half of the year. For instance, Honeywell's (HON - Analyst Report) CEO, Dave Cote, said "Economic conditions, however, remain challenging and we are not planning for any recovery in 2009".

Even Ford's (F - Analyst Report) comparatively strong July was aided by unique occurrences. The Cash for Clunkers program was a huge stimulus that clearly boosted sales. Not to mention that Ford's American competitors have been hobbled by bankruptcy.

I don't mean to throw cold water on today's ISM report. It was clearly a good number. But, just because the economy is inching towards recovery does not mean that strong growth is ahead. Rather, the pace of recovery will be painfully slow.

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