Honey, ISM Shrunk the Stock Market

Markets opened "green" on the first day of August, as Washington called over the contractors to patch its leaky debt ceiling -- but the optimism didn't last long. Markets are already turning bright red on news out of the Institute for Supply Management (ISM): American manufacturing is all but dead.

Here's how it looked:

Expected to keep on coasting in the mid-50s, ISM's "purchasing managers index" (PMI) survey of activity in the manufacturing sector instead jumped off a small cliff Monday. From a respectable, if uninspiring "55.3," the PMI report plunged to "50.9."

What do those numbers mean? For most of this year, PMIs in the mid-50s to low-60s have suggested modest expansion of American industry. Today, we're just a few tenths of a point away from a resumption of contraction -- and heading that way fast.

Perhaps the most troubling stat in today's report was the one for "new orders." At 49.2, this indicates that contraction has already begun. Inventories are shrinking even faster, reading a 44.0 on ISM's tachometer, while the backlog of orders awaiting fulfillment looks nearly as bad, showing 45.0. The trend suggests our whole economy is slipping back into recession.       

"Aside from that, Mrs. Lincoln, how was the play?"
If there's any good news to report, it's that with weak demand comes lower price pressure. According to ISM, "the rate of increase in prices slowed for the third consecutive month, dropping 9 percentage points in July to 59 percent." Prices are still running higher -- just not like wildfire. In particular, we're seeing lower prices on wheat and corn, which should lower costs at food concerns like Kellogg (NYSE: K  ) and General Mills (NYSE: GIS  ) -- and perhaps filter through the economy to lower your grocery bill.

Diesel fuel and gasoline prices are also down, a trend that could help Ford (NYSE: F  ) and General Motors (NYSE: GM  ) sell more fuel-thirsty -- but profitable -- light trucks and SUVs. It's also contributing to upgrades for Delta (NYSE: DAL  ) , United Continental (NYSE: UAL  ) , and JetBlue Airways (Nasdaq: JBLU  ) at ace Street analyst Dahlman Rose this morning.

Foolish takeaway
So all in all, it's a mixed morning for investors. Less inflation is certainly good news for the companies that use commodities. On the other hand, if it's coming at a cost of the whole economy shrinking ... that may be a higher price than any of us want to pay.