Today, the Institute for Supply Management (ISM) announced an August PMI of 52.9, a full 4 points higher than July and the highest we’ve seen since June 2007. Although many news sources and even President Obama himself were quick to declare the improved number as a sort of economic victory, ISM chairman Norbert J. Ore urged caution and realism:

“While this is certainly a positive occurrence, we have to keep in mind that it is the beginning of a new cycle and that all industries are not yet participating in the growth. The 4 percentage point increase was driven by significant strength in the New Orders Index, which is up 9.6 points to 64.9 percent, the highest since December 2004. The growth appears sustainable in the short term, as inventories have been reduced for 40 consecutive months and supply chains will have to re-stock to meet this new demand.”

Great points. Digging a little deeper into the industry cross-tabs and individual indices that make up the PMI does show a mixed bag for the economy, buyers and suppliers. For example, primary metals, plastics & rubber, and machinery all still experienced a contraction last month.

Overall, seeing the PMI over 50 doesn’t surprise me - we had been forecasting a move towards growth late in the 3rd quarter for more than 6 months. From a buyer’s perspective, there are two things to watch for in the next few months:

1. I expect the immediate reaction to be cautious optimism. Some of this spike was due to the Cash-for-Clunkers program and other government incentive packages in the US and abroad. Don’t be surprised if the number quickly flattens or declines slightly in coming months. It may not dip so deep that it becomes the feared double-dip recession, but the road to recovery will likely be bumpy.
2. Manufacturers may start to use this initial indication of a recovery as a justification for price increases. However, the manufacturing sector is a long way from being out of the woods, and buyers should continue to resist broad price increases at least until we see more sustained signs of recovery.

Pat Furey is a Senior Category Manager in Ariba’s Global Sourcing Organization. Pat leads the team of global category managers covering direct materials and indirect goods and services.