Thursday, April 1, 2010

US PMI Shows Building Strength in Manufacturing

The US ISM PMI came in at 59.6, beating estimates of 57 (ranging from 54 to 59), and February's 56.5 and showing further strengthening of the US manufacturing sector. A level over 50 indicates expansion. Much of the strength in the ISM numbers has been explained away by stimulus spending and inventory cycle, and the impulse from these drivers is probably still present. But there are some emerging signs that there could be glimmers of underlying strength starting to take hold too.

The chart below shows the main PMI index with the key leading indicator of new orders (still pretty strong by recent historical standards), and the employment index (which is still showing jobs net higher, albeit 1 point off). The chart points to a pretty sharp recovery, but obviously challenges still remain ahead.

One of the main boosters to the index was the prices index (see the below chart). Historically there has been a pretty strong relation between the prices index and headline CPI, the chart below demonstrates this and could herald further increases in inflation. However there is the base period effect and probably still some price normalisation impact (i.e. prices were dropped to increase sales, and now they're being brought back up). As an aside another key driver of the PMI increase was inventories (jumping up 8 points), showing that inventory rebuilding has been a key source of activity in the sector.

The final chart in this article shows the international trade component indices of the PMI. The reason I include this is that while it's likely that the US will end up having a cyclical recovery, in order to have a more structural and sustainable recovery there needs to be a sustained improvement in the export sector (as well as more saving and less spending). The chart shows both export and import indexes improving, but there is some promise from a slightly stronger export orders index.

So overall it was a pretty strong result in the PMI, and probing into the sub-indices shows that there may be some underlying strength. Backlogs are on the rise, new orders are still high in spite of inventories growing much stronger, production is strong, and international trade indexes are recovering sharply too. However there's also a few caution signs, for example the prices index was one of the main drivers of the strong PMI, and could herald some inflationary pressure. Also there's the big caution that it's still early days, and it will still be a few months yet before we can tell whether the recovery is still artificial or that it has some fundamental strength.

Econ Grapher Analytics
Institute for Supply Management
Bureau of Labor Statistics

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