By Mark Pender

NEW YORK (MNI) – A drop in the inventory index may or may not
reflect a production-based draw but it did hold back what would have
been a noticeably higher PMI without it, according to Institute For
Supply Management survey chief Norbert Ore.

Inventories fell back 3.8 points to 45.6 for the lowest reading of
the year, this while production held above 60 for a third month.
Month-to-month net change of the ex-inventories components was plus four
tenths. But with inventories included, May’s PMI fell seven tenths to
59.7.

“Companies are trying to build inventory and can’t. The destocking
went way too deep,” Ore told Market News International in a
telephone interview.

Ore said many manufacturers are struggling to get their products
out. He cites shortages of electronic components as a key example: “Yes
they are eventually getting what they need, and no there’s no huge
shortages. But lead times are extending.”

Despite the pressure, Ore doesn’t see much strength for the
inventory cycle. He cites a number of concerns that are holding back
expansion including the Gulf spill and whether it will begin to affect
demand. And as possible evidence of a Greek effect, he points to the
inventories index’s two-month downturn.

There is nevertheless a strong need to build inventories reflected
in the customer inventories index, a measure for finished goods. This
index returned to its record low of 32.0 hit in January.

Ore also doubts manufacturers will be aggressively adding jobs. But
employment, up 1.3 points to 59.8, did add most to May’s composite. This
index is rarely above 60, just once in the last expansion back, hitting
60.1 in May 2004.

“I don’t look for a rapid acceleration in manufacturing jobs.
Manufacturers have closed down their least efficient capacity, which
quite often doesn’t get reopened. Non-manufacturing is more important
for job growth.”

Ore’s caution extends to the PMI which he sees having already
peaked even if inventories begin to rise. “The PMI can’t sustain it. We
may have a couple more months of strong readings, but we’ve got to be
near the peak in terms of rate of change. I would look for that to
weaken somewhat for the balance of the year.”

** Market News International New York Newsroom 212-669-6430 **

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