Is It Time to Sound the Alarm on the Economy?


The Institute of Supply Management has some bad news for the U.S. economy: Our recovery could be in trouble.

On Tuesday, the ISM published its monthly Purchasing Managers' Index (PMI) report -- a gauge of acquisitions of goods and services across the United States -- and the numbers weren't pretty. Manufacturing activity continued to decline, extending the sector's contraction for a third straight month and sending it to the lowest point since mid-2009. As this gauge can often forewarn of where the economy's headed, you need to see which of the red flags in this month's report will affect your financial future.

What happened to the good times?
The ISM revealed August's PMI number at 49.6, where a score below 50 equals manufacturing decline. This isn't horrific by any means -- during the throes of the recession, the PMI sank to an abysmal low of 33.3. The overall economy itself grew for the 39th straight month, a good sign. Still, after nearly three full years of manufacturing growth between 2009 and earlier this year, the current three-month decline should prompt concern about the economy's direction.

The intricacies of the ISM's report should concern you more. New orders across manufacturing fell to a rating of 47.1, contracting for the third consecutive month and accelerating its decline. As companies chew through their order backlogs (which fell for the fifth straight month), the contraction of new orders spells frustration for manufacturers looking to meet revenue expectations.

With exports still contracting -- albeit at a slower rate -- it shouldn't be too surprising that demand dried up. China's slowdown hasn't helped anyone, and Europe's ongoing fiscal woes have harmed American sales abroad. If both trends continue, American manufacturers will be hard-pressed to continue maintaining their place overseas.

China's slowdown in particular has hammered industrials. Mining staples such as Vale (NYS: VALE) and Freeport-McMoRan (NYS: FCX) have felt the hit from decreasing Chinese infrastructure growth, suffering through year-to-date stock losses that fall far below 52-week highs. With GDP growth continuing to drag its feet, mining and metals stocks will be hard-pressed to capitalize on slowing infrastructure spending.

The numbers certainly don't instill confidence -- but where do companies stand to lose the most with these troubling statistics?

It's not time to panic just yet
With construction spending falling by the greatest amount in a year, manufacturers of heavy construction equipment such as Deere (NYSE: DE) face some tough times ahead. Since the U.S. drought has already taken its toll on Deere's farm equipment orders, this latest round of bad news represents just another shot to Deere's armor.

The PMI's sour note already slammed manufacturing leader Caterpillar's stock in Tuesday trading on fears of economic deterioration. While you shouldn't panic and abandon ship immediately, you should consider looming economic woes when making a move.

Surprisingly, strong auto sales in August shone a ray of hope in economic improvement. Ford (NYS: F) and other car manufacturers posted better-than-expected monthly sales, with consumer demand driven from the armada of aging vehicles on the road. Auto sales won't help the entire manufacturing sector, but they are a sign of optimism in an otherwise-gloomy economic outlook. Ford in particular looks strong, with its cheap valuation and strong domestic profit growth.

Stories like the auto industry's are a good sign: Manufacturing might be hurt by waxing and waning economic fortunes, but smart, well-managed companies will still succeed despite the odds.

Due diligence required
For all the negativity in this month's PMI release, investors shouldn't panic yet. You should keep an eye on the economy, particularly if overall economic growth turns south. The decline of new orders and manufacturing activity certainly isn't a good sign, but smart investors should use these metrics as part of a larger picture when seeking out great companies to invest in. Picks such as the aforementioned Caterpillar and Deere may have their work cut out for them, but they have proven records of success and great business models regardless.

Still, investors be warned. It's tough to predict whether the turbulent economy will continue its recovery or slide back down into decline. Putting all your bets on a sustained upswing could just come back to haunt you; if the PMI's negativity is a harbinger of future slowdown, you'll want to hedge your bets now.

As you begin your research, remember to dig into the details instead of just skimming the surface. If you're unsure where to begin and are interested in following Ford's fortunes, check out the Fool's recent premium report. It comes with a full year of updates, so pick up yours today!

Editor's note: A previous version of this article incorrectly stated that Ingersoll-Rand manufactures heavy construction equipment, but the company sold its construction businesses in 2007. We regret the error.

The article Is It Time to Sound the Alarm on the Economy? originally appeared on

Fool contributorDan Carrollholds no positions in the stocks mentioned in this article. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold and Ford.Motley Fool newsletter serviceshave recommended buying shares of Ford and creating a synthetic long position in Ford. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.