The Institute of Supply Management will be releasing the closely watched leading indicator covering manufacturing activity.
According to the economists polled, the median expectations point to a modest increase to 52.7 in July. This follows the drop to 51.7 in June which marked a third consecutive monthly decline in the index.
However, with the index still above 50, the PMI activity in the manufacturing sector is still in expansionary mode.
While the headline print might seem optimistic, the trend of PMI data, particularly over the past year, has been somewhat lower. And, so far, there is still no sign of a bottom in place.
However, if the data indicates an uptick from July, we could perhaps expect manufacturing growth to rise once again. But it would still be too early to tell. Focus will be on the sub-components of the ISM’s manufacturing report.
In June, the new orders were unchanged on the month. When taken in combination with production and employment growth, the figures were disappointing. The data underlined the slowdown in the manufacturing sector.
It was surprising, therefore, to see that the initial GDP estimates for the three months ending June 2019 were much lower compared to the year before.
Part of the declines in manufacturing is attributed to global economic uncertainty. There are a number of factors at play. However, the US trade policy further raises the risks of a downturn.
Regional Manufacturing Activity Picks up in June
One of the key data points to look at when setting expectations for the ISM manufacturing PMI is the regional data. Over the past few weeks, we have received regional manufacturing activity reports. These include the New York area, Philadelphia, Chicago and Richmond, among others.
Almost all the reports indicated a pickup in growth. However, most of the headline figures were driven by a modest increase in orders. Firms were optimistic of the business conditions in the near term.
The headline increase has evidently resulted in a slight increase in the ISM index forecasts. However, despite that, the data is yet to show strong evidence of growth.
Compared to the ground conditions, the US-China trade uncertainty remains the elephant in the room. While both countries have called for a temporary truce, business conditions are still suffering the impact of uncertainty.
Considering the fact that the US economy is enjoying one of the strongest economic expansion patches, a decline in manufacturing activity is not expected. The question remains whether this will signal the start of a slowdown, which is already evident, or whether it is an indicator of an impending recession.
Will Manufacturing Shift Gears in Q3?
Historically, the second quarter in the US economy is often one of the strongest. This is because it coincides with the April – June period where most of the activity takes place.
Businesses plan ahead for the summer months which often sees an increase in all-round activity, manufacturing included. This leads to higher activity during the period, as reflected in the second quarter GDP performance.
Typically, growth tends to slow off into the third and fourth quarter periods. Given the fact that the Q2 GDP data has been one of the weakest in recent times, the data underlines the larger concerns.
Investors are likely to brush aside a positive outcome of today’s ISM report unless there is a larger deviation from the forecasts. On the other hand, a negative outcome could most likely not see much of a reaction.
It would, at best, corroborate the recent monetary policy action from the Fed which cut interest rates for the first time since 2015. A move closer to the 50-level on the index could, however, raise panic.
This could eventually push the Fed to do more by lowering interest rates further.