US: ISM Mfg Index

Mon Jul 02 09:00:00 CDT 2018

Consensus Consensus Range Actual Previous
ISM Mfg Index - Level 58.5 57.0 to 60.0 60.2 58.7

Capacity stress, due to robust demand and also tariff disruptions, is a major concern for ISM's manufacturing sample. ISM's index, up 1.5 points in June to 60.2, topped Econoday's consensus range and got a boost from long delays in supplier deliveries, up more than 6 points to 68.2 to signal some of the worst disruptions since the oil crises of the mid-70s. Comments from the sample are focused on trucking constraints and also tariff effects and related uncertainties including the inability to plan ahead.

Yet the delays are not slowing production, up nearly a point in June to 62.3, though effects may be thinning inventories of finished goods which the sample is warning are too low. Input costs, though down slightly at 76.8, are nevertheless extremely elevated.

Order readings in this report continue to run at maximum performance, little changed at 63.5 for new orders and holding over 60 for backlog orders, at 60.1 which is very rare for this reading. Export orders, at 56.3, are holding strong despite tariffs as are import orders, up nearly 5 points at 59.0 in a reading that measures volumes and is not inflated by dollar hikes in tariffs.

Despite all the stress, ISM's sample continues to find available workers with employment steady at a very solid 56.0. Whatever hints there were of slowing in manufacturing, from weakness in the Philly Fed and loss of momentum in the flash PMI, June appears very likely to have been yet another month of acceleration for a factory sector that, tariffs or not, is taking a leading position in the 2018 economy.

Market Consensus Before Announcement
Econoday's consensus is calling for slight slowing at a still elevated level for the ISM manufacturing index, to 58.5 in June vs 58.7 in a May. But the top-end forecast is calling for acceleration to 60.0 in a reminder that both new orders and, in a rarity, backlog orders were both well over 60 in the last report.

The manufacturing composite index from the Institute For Supply Management 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 adjusted into a diffusion index which is calculated by adding the percentage of positive responses to one-half of the unchanged responses.

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.

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.

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.