Wednesday, May 5, 2010

US ISM - Manufacturing Takes the Lead

In this article we look at both ISM manufacturing and non-manufacturing indexes and ask "Are there any real indications of a sustainable economic recovery yet?" - with the the obvious implication of the broader economic outlook for the US. As a quick reminder the ISM manufacturing PMI came in at 60.4 (just below consensus 61.0, and above previous 59.6); meanwhile the non-manufacturing index came in at 55.4 (unchanged from March, and below consensus 56.4).

Neither of the headline results were particularly interesting apart from the fact they were both still definitely in expansionary territory. But as you'll soon see, a quick look under the surface reveals some pretty interesting moving parts.

Right, the first thing to note is that new orders shot up from 61.5 to 65.7 (only this time last year it was 47.2), new orders is the leading part of the PMI - it shows how much activity is set to come through the system. It's particularly interesting that the new orders index has stayed so strong for so long - one might expect the easing of the stimulus and inventory cycle effects to start taking a toll pretty soon - but hey, maybe there is some hint of underlying strength starting to show through...

The other interesting line in that chart is the employment sub-index, which has also shown some strength (note the details: 26% say higher employment, only 6% say lower now). The employment index is currently sitting at 58.5 (a reading above 49.8 is generally consistent with expansion of the main employment stats). This aspect also provides some interesting indications in terms of the near term outlook for the US economy.

Moving on to the non-manufacturing index, the results are still positive, but it's clear that the manufacturing sector is accelerating faster. The employment index for the non-manufacturing series is still below 50, but the breakdown is 22% higher vs 17% lower - slimmer margin than the PMI; but still positive. Many are looking for a solid improvement in employment for a recovery to take hold (and this is also probably a pre-requisite to Fed rate hikes), so the signs here are somewhat promising - however this is just one part of the economy, and there are still plenty of risks to the US economic recovery (including external risks!).

The last chart shows the prices indices from both series with the annual change in the Consumer Price Index overlayed (i.e. the main inflation proxy). The point of this is that both price indexes appear to be pretty reliable indicators of headline inflation. The other interesting part is the implications of rising prices: 1. It means that there must be at least some appetite from customers to pay the higher prices, 2. It means that margins may end up improving further (having been assisted by the drop in salary and wage costs - in part driven by the huge job losses seen through the crisis).

So there are some interesting signs coming through in the ISM indices for the manufacturing and non-manufacturing sectors. Sure there are still a lot of significant vulnerabilities in the US economy, and the economic recovery is far from sustainable at this point. But, there are some positive signs in the ISM numbers for April. Indeed it's even tempting to suggest that there are some faint glimmering hints of underlying strength coming through. But again, it's a long hard road to a sustainable economic recovery from here, with many bumps along the way.

Econ Grapher Analytics
Institute for Supply Management
Bureau of Labour Statistics

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