The June 2012 ISM Manufacturing Survey PMI declined, -3.8 percentage points, to 49.7% and indicates U.S. Manufacturing just went into contraction after 34 months of growth. In July 2009 the PMI registered 49%. New orders simply fell off of a cliff and hasn't been this low since April 2009. Prices paid for raw materials absolutely plunged. This is a downright frightening and terrible report.

One of the ISM survey respondents, Chemical products said there is simply weak demand and blamed the slow downs in both Europe and China for the contraction in U.S. manufacturing.

New Orders dropped -12.3 percentage points, to 47.8%. Here is the industrial ordered list on the decline in new orders. Nothing sticks out here as an anomaly, to explain the dramatic decline or indicate this is a one time event.

The seven industries reporting growth in new orders in June — listed in order — are: Printing & Related Support Activities; Furniture & Related Products; Miscellaneous Manufacturing; Fabricated Metal Products; Primary Metals; Electrical Equipment, Appliances & Components; and Paper Products. The 10 industries reporting a decrease in new orders during June — listed in order — are: Nonmetallic Mineral Products; Wood Products; Plastics & Rubber Products; Petroleum & Coal Products; Chemical Products; Food, Beverage & Tobacco Products; Transportation Equipment; Computer & Electronic Products; Machinery; and Apparel, Leather & Allied Products.

New Orders inflection point, where expansion turns into contraction, is not 50, it's 52.3%.

A New Orders Index above 52.3 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders.

PMI is a composite index on manufacturing. Here's how the ISM defines PMI:

The PMI is a composite index based on the seasonally adjusted diffusion indexes for five of the indicators with equal weights: New Orders, Production, Employment, Supplier Deliveries and Inventories.

Below is the ISM table data, reprinted, for a quick view.

Production, which is the current we're makin' stuff now meter, dropped -4.6 percentage points from last month to 51.0%. While technically not a contraction, production loosely correlates to the Federal Reserve's industrial production, but not at 50%, instead 51.2% to indicate growth. Notice this month the index is below that correlation.

This indicates growth for the 37th consecutive month. An index above 51.2 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures.

The manufacturing ISM employment index decreased -0.3 percentage points to 56.6%. The neutral point for hiring vs. firing is 50.1%. Employment is a lagging indicator so I would expect this subindex to drop in the coming months.

Below are the BLS manufacturing non-farm payrolls (jobs) for the past decade on the left, in red, graphed against the ISM manufacturing employment index on the right, in blue. The BLS number is simply raw manufacturing jobs tally, from the CES, not taking into account population growth or overall sector shrinkage as well as time lag. One can eyeball a slight correlation in the middle of the decade, yet note the divergence this recovery, starting late 2008.

Inventories slightly declined -2.0 percentage points to 44%. Inventories are contracting, for the 3nd month in a row. The ISM claims inventories are correlated to manufacturing inputs, that are part of GDP. Changes in inventories only made up 5.3% of Q1 2012 GDP, but this is all inventories, not just manufacturing.

An Inventories Index greater than 42.8 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis' (BEA) figures on overall manufacturing inventories.

Supplier deliveries are how fast manufacturers can get their supplies. A value higher than 50 indicates slower delivery times, a value below 50 means the supply chain is speeding up. The index increased +0.2 percentage points to 48.9% and the ISM reports this it the 5th month supplier deliveries have been faster.

Backlog of orders dropped -2.5 percentage points to 44.5% and are in contraction. Order backlogs are exactly what they sound like and only 86% of survey respondents reported on order backlogs.

Imports had no change from again, same as the last two months and is at 53.5%. Imports are materials from other countries manufacturers use to make their products.

New orders destined for export, or for customers outside of the United States, plunged -6.0 percentage points to 47.5% and is in contraction, which hasn't happened since June 2009. The exports index is also lower than June 2009's 49.5% and was in growth up to this point for 35 months. This potentially shows Europe's slowdown is really starting to affect the United States.

The six industries reporting growth in new export orders in June — listed in order — are: Textile Mills; Wood Products; Furniture & Related Products; Fabricated Metal Products; Miscellaneous Manufacturing; and Electrical Equipment, Appliances & Components. The seven industries reporting a decrease in new export orders during June — listed in order — are: Nonmetallic Mineral Products; Apparel, Leather & Allied Products; Paper Products; Machinery; Chemical Products; Computer & Electronic Products; and Transportation Equipment.

Prices absolutely plunged again, -10.5 percentage points to 37%. Prices are what manufacturers pay to make their products. This is the lowest reading since April 2009 when the price subindex was 32%. That's an astounding one month drop and for the last two months prices have plunged a total of 24 percentage points. Here is the ISM's industry specifics for prices paid for raw materials:

Of the 18 manufacturing industries, three reported paying increased prices during the month of June: Furniture & Related Products; Printing & Related Support Activities; and Primary Metals. The 11 industries reporting paying lower prices during June — listed in order — are: Petroleum & Coal Products; Plastics & Rubber Products; Food, Beverage & Tobacco Products; Fabricated Metal Products; Electrical Equipment, Appliances & Components; Chemical Products; Machinery; Paper Products; Transportation Equipment; Miscellaneous Manufacturing; and Computer & Electronic Products.

Customer's inventories jumped up +5.0 percentage points to 48.5%. Below 50 means customer's inventories are considered by manufacturers to be too low. Customer inventories, not to be confused with manufacturer's inventories, is how much customers have on hand, or rates the level of inventories the organization's customers have. This jump might indicate sudden weak demand.

Here is the ISM industrial sector ordered list of growth and contraction:

Of the 18 manufacturing industries, seven are reporting growth in June, in the following order: Furniture & Related Products; Printing & Related Support Activities; Fabricated Metal Products; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; Machinery; and Primary Metals. The nine industries reporting contraction in June — listed in order — are: Nonmetallic Mineral Products; Apparel, Leather & Allied Products; Paper Products; Plastics & Rubber Products; Chemical Products; Computer & Electronic Products; Petroleum & Coal Products; Food, Beverage & Tobacco Products; and Transportation Equipment.

The ISM has a correlation formula to annualized real GDP, but they are now noting the past correlation. Notice also that the PMI went to equal weighting in 2008. Annualizing June's data, the ISM get a 2.4% 2012 annual real GDP. The below graph plots real GDP, left scale, against PMI, right scale. One needs to look at the pattern of the two lines to get anything out of this graph. If they match, GDP goes up, PMI goes up, would imply some correlation.

The ISM neutral point is 50, generally. Above is growth, below is contraction, There is some some variance in the individual indexes and their actual inflection points. For example, A manufacturing PMI above 42, over time, also indicates growth, even while manufacturing is in the dumpster.

Here is last month's manufacturing ISM overview, unrevised.

The ISM has much more data, tables and analysis on their website. For more graphs, see St. Louis Federal Reserve Fred database and graphing system.

PMI stands for purchasing manager's index.