US: ISM Mfg Index


Mon Aug 03 08:10:00 CDT 2015

Consensus Consensus Range Actual Previous
ISM Mfg Index - Level 53.7 53.0 to 54.5 52.7 53.5

Highlights
Weak employment and continued contraction in exports held down the manufacturing index which slipped 0.8 tenths in July to a lower-than-expected 52.7 to indicate slowing monthly activity for ISM's sample. Employment growth slowed nearly 3 points to 52.7 while new export orders fell 1.5 points to 48.0 for the 5th sub-50 contractionary reading of the last 7 months.

But there are signs of strength in the report led by new orders which rose 1/2 point to 56.5 which is the strongest reading of the year for this most important of all readings. The gain contrasts with the drop in export orders and points to strength in the domestic economy. Production is also strong at 56.0.

But another negative in the report is sharp contraction in backlogs, down 4.5 points to 42.5 to signal the sharpest draw in nearly 3 years. This drop helps explain the slowing in employment but is offset in the longer term outlook by the rise in new orders.

This report is mixed with export orders pointing to continuing headwinds for the manufacturing sector though total new orders are a plus. Note that this report was posted before its usually scheduled 10:00 a.m. ET release time.

Market Consensus Before Announcement
The ISM manufacturing index is expected to hold steady, at 53.7 in July vs 53.5 in June. This report has been trending in the low 50s, signaling only marginal growth for a sector that has actually been in slight contraction. New export orders are an important reading in this report, coming in under 50 in four of the last six reports in an accurate signal of export contraction.

Definition
The ISM manufacturing composite index is a diffusion index calculated from five of the eleven sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms nationwide. The survey queries purchasing managers about the general direction of production, new orders, order backlogs, their own inventories, customer inventories, employment, supplier deliveries, exports, imports, and prices. The five components of the composite index are new orders, production, employment, supplier deliveries, and inventories (their own, not customer inventories). The five components are equally weighted. The questions are qualitative rather than quantitative; that is, they ask about the general direction rather than the specific level of activity. Each question is transformed into a diffusion index which is calculated by adding the percentage of positive responses to one-half of the unchanged responses.



Description
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the ISM manufacturing index, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.

The ISM manufacturing data give 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. More than one of the ISM sub-indexes provide insight on commodity prices and clues regarding the potential for developing inflation. The Federal Reserve keeps a close watch on this report which helps it to determine the direction of interest rates when inflation signals are flashing in these data. As a result, the bond market is highly sensitive to this report.

Importance
The ISM manufacturing composite index indicates overall factory sector trends. The relevance of this indicator is enhanced by the fact that it is available very early in the month and is not subject to revision.

Interpretation
The bond market will rally (fall) when the ISM manufacturing index is weaker (stronger) than expected. Equity markets prefer lower interest rates and could rally with the bond market. However, a healthy manufacturing sector, indicated by rising ISM index levels, bodes well for corporate earnings and is bullish for the stock market.

The level of the ISM manufacturing index indicates whether manufacturing and the overall economy are growing or declining. Historically, readings of 50 percent or above are associated with an expanding manufacturing sector and healthy GDP growth overall. Readings below 50 indicate a contracting manufacturing sector but overall GDP growth is still positive until the ISM index falls below 42.5 (based on statistics through January 2011). Readings in between these two levels suggest that manufacturing is declining while GDP is still growing but only very slowly.

In addition to the ISM manufacturing composite index, the various sub-components contain useful information about manufacturing activity. The production component is related to industrial production, new orders to durable goods orders, employment to factory payrolls, prices to producer prices, export orders to merchandise trade exports and import orders to merchandise imports.

Vendor (supplier) deliveries are an important component of report. The more slowly orders are filled and delivered, the stronger the economic growth and the greater the potential for inflation. When orders are filled quickly, it means that producers don't have as many to fill.

The ISM manufacturing composite index and its sub-components can be subject to some monthly volatility, making the three-month average of the monthly levels more indicative of the trend.