ISM indexes suggest strong activity

10 September, 2018

ISM indexes suggest strong activity in services and manufacturing sector for August

The Institute of Supply Management's business survey covering the manufacturing and non-manufacturing sector showed that activity reached the highest levels in over fourteen years.

The data cemented optimism that the U.S. economy is likely to maintain its pace of GDP output into the third quarter of the year. The survey which dates back to 1948 showed that manufacturing activity reached to 61.3 in August. This represented the highest reading since May 2004.

Data showed that the details of the survey were firm. The ISM's new orders index rose from 60.2 in July to 65.1 in August. The survey's diffusion index suggests that with a reading above 50 points the U.S. manufacturing sector was advancing strongly.

The ISM's data touched the 60+ levels after easing back previously. Data shows that the U.S. economy was driving along led by strong internal drivers. Growth in the corporate capital expenditure was also healthy. The data pointed to an early estimate that the U.S. economy was expanding at a pace of 3.2% on the year.

The Trump administration is targeting a 4% GDP growth, which still looks ambitious. However, there are significant weak links to the overall economy. The weakness comes mostly from the housing market which has been slowing in recent months.

Although the data on a month to month basis is volatile, the indications point to the fact that higher mortgage rates are making home buyers think twice on the issue of affordability.

Car sales were also seen coming in flat over the recent months. However, the underline factors confirm the view of an around 3% GDP average growth for this year.

The ISM's non-manufacturing index, on the other hand, increased to 58.5. It was well above the median estimates of an increase to 56.8.

All significant measures of activity were seen higher in August indicating an expansion. The business activity index in the non-manufacturing sector was seen rising to 60.7 in August from 56.5 in July.

New orders index advanced to 60.4 from 57.0 in July. ISM reported that sixteen out of the eighteen sectors in the services industry reported growth during the month. Only one sector was seen to be declining.

The forward-looking sub-indicators pointed to strong activity in the coming months.

Deliveries continued to be delayed due to a shortage of labor. The delays alongside an increase in the new orders index were seen to be putting pressure on the price index.

Although this is not an indicator that inflation will go higher in the near term, the data underlined the fact that the U.S. inflation rate was firmly entrenched around the Fed's two percent inflation target rate.

On the flipside, not all data was solid. Factory orders fell in July. Data from the Commerce Department showed that orders for manufactured goods fell 0.8% to a seasonally adjusted $497.75 billion.

It was more than the median estimates of a 0.6% decline. The factory orders in July showed that biggest monthly decline since January when activity fell 1.6% on the month.

Excluding transportation, factory orders were seen rising 0.2% while excluding the defense sector, and orders declined 0.4%.

The U.S. dollar was however muted to the data with both measures of the ISM indicators suggesting that the U.S. economy continued to fire on most cylinders. The Friday’s payrolls report further cemented this view.

Although the U.S. unemployment rate was steady at 3.9%, wage growth jumped sharply rising 0.4% on the month. The reading brought the yearly average hourly earnings to 2.9% in August from 2.7% in July.

The data comes ahead of the Fed’s meeting due later this month. The markets have already priced in a 25 basis point rate hike this month with the Fed likely to proceed with another rate hike in December 2018.

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