Thursday, June 3, 2010

US PMI: Manufacturing and Services - Where to from here?

US Non-manufacturing PMI held at 55.4 for the 3rd month in a row, against expectations for a rise to 55.6. While the headline didn't move, the sub-indices showed a bit of variance. The employment index crept up with 22% still saying higher, and those saying lower dropped to 13% from 17%, indicating respondents reporting net jobs added. New orders dropped off by -1.1, but backlog of orders increased by 6.5 in a positive sign that spare capacity could be starting to get used up in some sectors.

The data adds to positive numbers reported in the manufacturing PMI release earlier in the week, where the index saw little movement, dropping to 59.7 from 60.4, and close to consensus 59.5. New orders held at 65.7, a very strong number and positive future indicator for activity, and the employment index rose again to 59.8, with a net 22% reporting hiring intentions. This is characteristic of a rebound, with the hiring showing any spare capacity being used up, and some normalisation in jobs levels following inevitable over-shooting in firings during the crisis.

Taken together, the numbers from the ISM indexes are pretty strong. The key sub-indices are where they should be for a continuation of the recovery, and the indicators point to a further pick up in activity, or at least maintaining activity in the near term. They also both point to normalisation in staff levels, which will be positive in terms of the whole upward cycle thing (i.e. people get jobs, income goes up, savings go up (wealth rebuilding), spending goes up, and so-on). So these numbers give one cause for comfort in assessing the continuation of the recovery. But given the damage caused by the crisis, and eventual removal of stimulus, it's likely to end up slower and lower than usual.

Econ Grapher Analytics
Institute for Supply Management

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