In August 2011, the ISM manufacturing index fell fractionally to 50.6 from 50.9 in July. This was above market expectations for a fall to 48.5. The ISM has been above the key 50 index level for 25 consecutive months, although there has been a clear loss of momentum in recent months. More positively, the dramatic fall-off in the Philadelphia Fed Index two weeks ago now seems overstated and not reflected in either yesterday’s Chicago PMI or the today’s ISM data.
A breakdown of the ISM index shows a mixed outcome. Encouragingly, the New Orders index rose by 0.4 index points, but remained fractionally below 50 at 49.6. Also the employment index remained surprisingly above 50 at 51.8, but fell 1.7 index points during the month.
On the negative side, the production component fell 3.7 index points to a concerning 48.6, while exports fell 3.5 index points.
The rate of increase in Prices slowed for the fourth consecutive month to 55.5, from a recent high of 85.5 in April 2011. This is signalling less inflationary pressure at the producer level, which is partly related to the recent fall-off in commodity prices.
The Institute for Supply Management surveys nearly 400 manufacturing firms on employment, production, new orders, supplier deliveries, and inventories. A composite diffusion index of national manufacturing conditions is constructed, where reading above (below) 50 percent indicate an expanding (contracting) factory sector. Export orders, import orders, backlog orders and prices paid for raw and unfinished materials are also measured, but these are not included in the overall index.
The ISM manufacturing data gives a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. The Federal Reserve keeps a close watch on this report. Since 1970 the ISM manufacturing index has averaged 52.6, while since 1990 the index has averaged 51.1
According to the ISM, "The overall sentiment is one of concern and caution over the domestic and international economic environment, which is affecting customers' confidence and willingness to place orders, at least in the short term."
Although the ISM index beat expectations in August, and remains fractionally above the 50 index level, the index has slowed appreciably in recent months signalling a significant loss in momentum. The US economy is experiencing a crisis of confidence (which is highlighted by the comments made by the ISM itself) and is perilously close to recession.
We still expect that the US Q3 growth rate will show an improvement relative to the weak Q2 performance and that the US economy can avoid a return to outright recession conditions, but equally we still expect the growth rate to lack vibrancy and remain well below trend.
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