Manufacturing ISM Highest Since June; Expiring Business Tax Credits Explain Why; Enjoy it While You Can As US Decoupling Won’t Last


The Institute for Supply Management released the December 2011 Manufacturing ISM Report On Business® “The PMI registered 53.9 percent, an increase of 1.2 percentage points from November’s reading of 52.7 percent, indicating expansion in the manufacturing sector for the 29th consecutive month. The New Orders Index increased 0.9 percentage point from November to 57.6 percent, reflecting the third consecutive month of growth after three months of contraction. Prices of raw materials continued to decrease for the third consecutive month, with the Prices Index registering 47.5 percent, which is 2.5 percentage points higher than the November reading of 45 percent. Manufacturing is finishing out the year on a positive note, with new orders, production and employment all growing in December at faster rates than in November, and with an optimistic view toward the beginning of 2012 as reflected by the panel in this month’s survey.”

Index Series Index Sep Series Index Aug %age Point Change Direction Rate of Change Trend* (Months)
PMI 53.9 52.7 +1.2 Growing Faster 29
New Orders 57.6 56.7 +0.9 Growing Faster 3
Production 59.9 56.6 +3.3 Growing Faster 4
Employment 55.1 51.8 +3.3 Growing Faster 27
Supplier Deliveries 49.9 49.9 +0.0 Growing Same 2
Inventories 47.1 48.3 -1.2 Contracting Faster 3
Customers’ Inventories 42.5 50.0 -7.5 Too Low From Unchanged 1
Prices 47.5 45.0 +2.5 Decreasing Slower 3
Backlog of Orders 48.0 45.0 +3.0 Contracting Slower 7
Exports 53.0 52.0 +1.0 Growing Faster 2
Imports 54.0 49.0 +5.0 Growing From Contracting 1
OVERALL ECONOMY Growing Faster 31
Manufacturing Sector Growing Faster 29

Expiring Business Tax Credits Partially Responsible

Looking for an explanation for the rise in December? I have one (and was aware of a likely jump in PMI in advance): 2011 Expiring Business Tax Incentives

Expiring Business Tax Incentives

  1. 100% Bonus Depreciation – The bonus depreciation  deduction for qualifying property placed into service after September 8,  2010 and through 2011 was increased to 100%. Once the incentive expires  the depreciation rate reverts back to 50% bonus depreciation.
  2. Self-Employment Tax Reduction – In 2011, the  self-employment tax was reduced on a temporary basis. Individuals who  are self-employed only need to pay a Social Security tax of 10.4%  (reduced from 12.4%) and 2.9% Medicare tax on qualifying income.  Self-employed individuals can also take a deduction for the 6.2%  employer’s share of Social Security with a 1.4% employer’s share of  Medicare as an above-the-line deduction.
  3. Section 179d Depreciation Provisions – The increase  in expensing limits under Section 179d for 2011 at $500,000/$2,000,000  (equipment/property) will be phased out at the end of 2011. In 2012, the  rates will reduce to $125,000/$500,000 (equipment/property) until  December 31, 2012..
  4. 15 Year Straight Line Depreciation – This allows  property owners and lessees to depreciate qualifying improvements to  commercial office spaces, as well as restaurant leasehold improvements  and new restaurant development.
  5. Enhanced Charitable Deductions. This tax credit  allows C-Corporations the opportunity to claim an enhanced charitable  deduction for qualified computer contributions, book inventories to  school and food contributions to food depositories.
  6. Employer Wage Credit for Active Military Reservists– This tax credit provides eligible small businesses (companies with 50  or fewer employees) with a credit against the company’s income tax  liability for a taxable year in an amount equal to 20% of the sum of the  wage payments made to activated military reservists..
  7. New Markets Tax Credit – This tax credit offers a  39% credit on an equity investment to a Community Development Entity  (CDE) that is claimed over a 7 year compliance period. The CDE must then  make a Qualified Equity Investment or loan to a Qualified Business in a  Qualified Low Income Community (LICs). Most commercial and mixed-use  real estate development located in LICs are considered Qualified  Businesses. The credit is designed to encourage investment in LICs that  traditionally have limited access to debt and other sources of  investment income.
  8. Credit for Construction of New Energy Efficient Homes  – This tax credit provides an eligible contractor which constructs a  qualified new energy efficient home a credit of up to $2,000 per home.  The credit is available for all new homes, including manufactured homes  constructed in accordance with the Federal Manufactured Homes  Construction and Safety Standards.
  9. Energy Efficient Appliance Credit. This tax credit  is available to companies that manufacture or produce qualifying models  of refrigerators, dishwashers and washers/dryers. The credit is  available for models produced in 2008, 2009, and 2010. The amount of the  credit is dependent on the efficiency of the model and date the  appliance was manufactured.
  10. Alternative Fuel Vehicle Refueling Property Credit.  This tax credit provides a 30% credit of the cost of any alternative  fuel vehicle refueling property placed into service in 2011 (not  including hydrogen stations). The credit is limited to $30,000 per  location for commercial clean fuel property, and $1,000 per location for  residential clean fuel property.

Some of the above incentives are minor but others likely had a major impact.

Think manufactures did not bring massive amounts of production forward to take advantage of these expiring credits?

Enjoy it While You Can As US Decoupling Won’t Last

Manufacturers are producing at an unsustainable rate. The global economy is rapidly cooling led by Europe, Asia, and Australia. That is a lot of downside leadership.

Please note that Eurozone Manufacturing Contracts 5th Straight Month; New Orders Fall Faster than Output

The US will not decouple this year as noted in Major Slowdown in Global Trade Coming Up; Think the U.S., China, Germany, or U.K. will Be Immune?

Expiring tax incentives provided a nice, but unsustainable pop in manufacturing. Notice how prices and backlog of orders did not follow.

Regardless of how much tax credits affected the ISM numbers, the global slowdown will take a toll on US manufacturing.

Mike  “Mish”  Shedlock – Global Economic Analysis