ISM Manufacturing to Rebound in August

The Institute for Supply Management’s monthly manufacturing index gauge, the manufacturing PMI, is due today. Economists forecast that the manufacturing activity, as measured by ISM will tick modestly higher.

After the index fell to 51.2 in July, expectations are optimistic, forecasting a slight increase to 51.4 in August. The uptick in the manufacturing sector, although not dramatic, indicates a modest improvement.

Global manufacturing has been widely hit due to a number of factors. These include the late business cycle and the ongoing trade war between China and the United States. Higher tariffs are expected to put a lid on the global manufacturing sector.

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The ISM manufacturing PMI hit a high of 61.3 in October last year. But, since then, after a brief rise, the sector has been in a steady decline.

So far, manufacturing activity is well above the 50-level of the index. As long as the index is above 50, it indicates expansion. But there is a cause for concern.

In a separate gauge of manufacturing activity, IHS Markit reported that in August, the US manufacturing sector contracted. While there is no direct correlation between IHS Markit’s and ISM’s purchase manager’s index, the decline in the data from Markit is a cause for concern.

In the unlikely event that ISM’s manufacturing PMI falls below the 50 index, it would be the first time since August 2016. Back then, the index fell to 49.4.

Regional Manufacturing Surveys Rise Modestly 

Forward leading indicators for the manufacturing sector from various regions in the US gives evidence that there is a possible increase in activity.

• The Philly Fed Manufacturing index registered a headline print of 16.8. This was, in fact, a decline from 21.8 in July. But the data came out better than expectations.
• The Empire State Manufacturing index, covering the New York area, did fairly better. The index rose to 4.8 points in August, from 4.3 in the month before. The data once again was better than the forecasts.
• Finally, the Richmond Fed manufacturing index recovered from dropping to -12 in July. The index rose to +1 in August, suggesting a strong recovery in the sector.

Combined, the above regional data supports the view that manufacturing activity might have recovered. However, it is important to note the seasonality as well.

Given the fact that August is the month where most vacations are taken, there is a likelihood that the manufacturing gauge could be lower than the actual.

What this means is that in the coming months, especially in September, we could expect to see a rebound in the US manufacturing sector.

ISM PMI to Set Tone for Friday’s Payrolls

Today’s manufacturing PMI will also give us a glimpse into how Friday’s payroll figures for August will shape up.

The US manufacturing sector is quite important. Just last week, President Trump squarely put the blame for the slowdown on the Federal Reserve. The central bank has so far cut interest rates once in July.

The Fed lowered the short term fed funds rates by 25 basis points. However, President Trump has called on the Fed to do more, including restarting QE. This has been one of the main sticking points.

Meanwhile, economy watchers blame the current slowdown in the manufacturing sector on aggressive trade policies pursued by Washington. Recently, President Trump called for all US companies to seek an alternative to China. He also called for US companies to move manufacturing back to the United States.

Given the current landscape, today’s ISM manufacturing PMI will be an important indicator to watch. It will have an impact, not just on the monetary policy but also potentially set the course for the US government as well.

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