US: ISM Defying Gravity

Daily Forex Fundamentals | Written by Danske Bank | Jul 01 08 16:40 GMT |

Overview: In June the ISM index rose to 50.2 from 49.2, once again proving more resilient than expected and continuing to indicate that the US manufacturing sector is holding up quite well compared to other sectors of the economy. The price index rose further to 91.5 in June (the highest reading since 1979) from 87.0 in May, reflecting intensifying price pressures in raw material markets.

Details: The details of the survey were mixed. Importantly, though, the strength was not seen in the forwardlooking parts of the survey: both new orders and production were relatively unchanged at, respectively, 49.6 (previously 49.7) and 51.5 (previously 51.2), suggesting the manufacturing sector essentially continues to move sideways. The increase in the composite was mainly driven by higher readings in the index of manufacturers' inventories (51.2 vs. 48.0) and the supplier deliveries index (55.1 vs. 48.0), as employment dipped to a five-year-low of 43.7 (prev. 45.5).

A higher inventory reading was also evident among customers (wholesalers) where the index jumped to 55 from 47. We generally see the higher readings on inventory indexes as an indication of further weakness ahead, as it was not matched by an improvement in the new orders index.

We are somewhat puzzled by the continued rise in the supplier deliveries index. Traditionally, rising delivery times have been used as an indicator of capacity pressures - or underlying strength - in the manufacturing industry. However, this time around it does not fit the overall picture that capacity within the manufacturing sector should be tightening. Hence, we read it more as a reflection of tight global commodity markets and therefore in this sense the index could still be useful as an indicator of underlying inflation pipeline pressures, but probably not as an indicator of underlying strength. Along with the high reading in the price index, it definitely sends a troublesome signal on inflation.

Assessment & Outlook: Even in light of low inventories and strong export demand, we are a bit puzzled about the resilience in the manufacturing ISM. As we mentioned in our preview yesterday, all local indices have been moving lower in June and were pointing to an ISM reading of 48. Moreover, much of the usual dynamics captured by our models suggest that the index should be moving lower as well. Maybe some of the explanation is that the majority of businesses surveyed by the ISM are represented in the export sector.

Going forward, we continue to favour a scenario where the ISM is moving lower during the coming months, as domestic demand is likely to remain soft. Even if the stimulus payments are kicking in faster than expected, it should be some time before they are felt in manufacturing output.

Danske Bank

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