Will the ISM manufacturing PMI hold up in February?

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The Institute of Supply Management (ISM) will be releasing the closely watched manufacturing PMI report today. According to the economists polled, forecasts point to a modest decline in the index.

The ISM manufacturing PMI is forecast to slip to 50.5 in February. This follows a surprise rebound in the index in January. Following a five-month contraction (reading below 50), the ISM manufacturing PMI rose to 50.9 in January.

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Investors gave a sigh of relief on the report. This is attributed to the success of Washington and Beijing striking a trade deal, albeit a small one in comparison.

For the moment, in the US markets, various regional manufacturing gauges have been somewhat resilient. In the past month, nearly all the regional indexes came out with positive readings.

The Philly Fed Manufacturing index rose to 36.7 from 10.0. This was the highest level the index ever rose to in three years. Various sub-components of the index were also positive. This includes new orders and business outlook.

The Empire State Manufacturing index rose from 4.8 in January to 12.9 in February. This was the highest level in nine months. Again, the new orders index rose sharply including the shipments index. However, business optimism was subdued.

The Richmond Fed manufacturing index was the exception. It fell from 20 to -2 in February. Here, all components recorded a decline except the local business conditions which saw modest improvement.

The Chicago Manufacturing Index jumped to 49.0 in February from 42.9 previously. The February reading still indicates a contraction in the regional manufacturing sector. But still, the underlying factors are starting to push things up a bit. The Chicago PMI is into its sixth month of contraction, but the reading is the highest since August last year.

Can the US Manufacturing Sector Stay Resilient to a Slowdown?

So far, the various gauges of the manufacturing sector are somewhat positive, to say the least. It sets the expectations that the manufacturing activity in the world’s largest economy is resilient. The question is for how long though.

The pick up in business activity in January was encouraging. But just as one thought that things would get better, the coronavirus outbreak has engulfed the global markets.

Global trends show that China has been particularly hard hit. The official manufacturing PMI figures fell to an all-time low. This was even lower than the declines during the financial crisis.

While the forecasts and considering the regional surveys might point to stability on the ISM manufacturing PMI, there are a few things to bear in mind.

  • Besides the crisis caused by the virus outbreak, another factor to bear in mind is the transportation sector. With Boeing company stopping production of the 737 airplanes, the full effects could be seen this month.
  • It is important to note that regional manufacturing gauges do not take into consideration the transportation sector. This could cause the index to deviate quite a bit. Secondly, the regional indexes do not have much exposure to global trade, including China.

And even if the data for February comes out within expectations, there still a lot to watch out for. The US CDC cautioned on the risks of a community spread of the virus. If this is valid, then domestic demand will be hit very hard.

Therefore, in conclusion, today’s ISM manufacturing PMI will be interesting to watch for. The upside of a positive reading will see not much of a reaction, but a negative reading will likely cause concerns among investors. This, in turn, will lead up to this Friday’s payrolls report which will be yet another catalyst.

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