Was July just a bump in the road to recovery?

Investors seem to think so, and maybe they're right. When the Institute of Supply Management reported in July that its "Purchasing Managers Index" had dropped to the lowest level of 2010, that was pretty scary stuff. But yesterday's news that the PMI rose 0.8% in August suggests the worst may be over. That maybe, just maybe, we've "bounced off the bottom," and the economy's ready to rise again ...

At least, that's the way Wall Street seems to be seeing things. And yet, a 0.8% gain in an obscure index seems an awfully thin reed to support the 3% market-cap weight gain experienced at the 500 largest companies in America on Wednesday. So, how much "structural integrity" does this here reed have, anyway? Let's dig into the numbers and find out.

The good
First off, production swung from a decline in July to a 2.9% increase. New orders "coming down the pike" moderated, down only 0.4%. Overall, ISM says: "Economic activity in the manufacturing sector expanded in August for the 13th consecutive month." This suggests that the boffo reports we saw from heavy industrials like Caterpillar (NYSE: CAT), Textron (NYSE: TXT), and United Technologies (NYSE: UTX) for the latest quarter could repeat when these companies report again next month.

The bad
There were caveats. In one pithy quote, ISM warned of "large customers reducing pull rates for production." And true to form, the backlog of orders waiting to be filled was fast evaporating, down 3%. Inventories were still trending up, rising 1.2% at manufacturers and 4.5% at their customers. If numbers like these lead you to think, "channel stuffing," well, you're not the only one.

And the ugly truth
Bulls will surely object that this morning's news on the retail front was "good" -- August same-store sales up nearly 2% at Target (NYSE: TGT), 7% at Costco (Nasdaq: COST), and 10% at Limited Brands (NYSE: LTD). They'll quote manufacturers saying "their customers' inventories are too low at this time," and argue that the rise in inventories is actually a good thing.

Color me skeptical. According to the Associated Press, "aggressive discounting" played a big role in these strong-ish retail sales. Yet even with discounting, Target's comps number missed its, er, goal. Sales slipped at companies that refused to play the discounting game, like Aeropostale (NYSE: ARO). Seems to me, if retailers need to bribe customers to take goods off their hands, that's not really a "not-enough-inventories" situation at all -- and it might foreshadow the next leg down in this "recovery."

But enough about me. Take the Foolish Rorschach test. Do you see something different in today's chart? Tell us about it below.

Fool contributor Rich Smith does not own shares of any company named above. Rich is not a licensed economist, but he plays one on the Web. Check out his latest stock recommendations on Motley Fool CAPS. The Fool has a disclosure policy.

Costco Wholesale is a Motley Fool Inside Value choice and a Stock Advisor selection. The Fool has established a bear put spread position on Caterpillar. The Fool owns shares of Aeropostale and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.