9/3/2010
By David Urani, Research Analyst

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On Wednesday we noted here that there was something a little fishy with that ISM manufacturing number. We noted how the numbers just weren't consistent at all with what had previously been reported by the Chicago PMI and the Philly Fed reports in the same month, which track the same sorts of trends in the production sector. It also didn't seem to match up with the ADP employment report released on the same day which showed a 40,000 job decrease in the goods-producing sector. Well, strike three came today in the BLS' employment report. August manufacturing employment, according to the BLS, showed a 27,000 job decrease, once again running well contrary to the ISM number.

The thing is, the way the ISM composite index is calculated is by averaging each of five components: New orders, production, employment, supplier deliveries, and inventories; each with equal weighting. That means employment has significant sway on the index, and at a reading of 61.5, it was the biggest number among the five components. Considering that numbers above 50 indicate expansion and numbers below 50 indicate contraction, that 61.5 figure must be well off the mark. Let's assume both the ISM and the BLS employment numbers were erroneous and call it a wash; adjusting the employment component to 50 (indicating no change) yields an ISM headline number of 54.2, which would have marked a slowdown from July's 55.5. Of course, if you believe the ADP and the BLS reports on manufacturing employment, then a reading below 50 for the ISM employment component would be more prudent, and would obviously take the headline number yet lower.

So there you are, we are calling out the ISM for this month. Although in reality the headline index likely deserves to still be above 50, we suspect manufacturing sector growth slowed in August. Now we have to wonder about that 255 point rally in the Dow on Wednesday.

Report Prepared by: David Urani

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David Urani
Wall Street Strategies