US ISM Manufacturing August 2010

In August 2010, the Institute for Supply Management (ISM) manufacturing index rose to 56.3 from 55.5 in July 2010. This was much better than market expectations for a fall to 52.7. Despite all the negative stories, the ISM index has been above the key 50 index level for the past 13 consecutive months and above the long-term (since 1948) average of 52.6 for 11 consecutive months – surely that is not a double-dip recession?

The improvement in the ISM manufacturing index during August 2010 was mainly due to a healthy rise in the production index (up to 59.9 from 57.0) as well as a very solid increase in the employment index (up to 60.4 from 58.6). On the downside, the critical new orders component of the ISM fell further to 53.1 from 53.5 in July 2010.

The ISM, surveys nearly 400 manufacturing firms on employment, production, new orders, supplier deliveries, and inventories. A composite diffusion index of national manufacturing conditions is constructed, where a reading above (below) 50 percent indicates an expanding (contracting) factory sector. Export orders, import orders, backlog orders and prices paid for raw and unfinished materials are also measured, but these are not included in the overall index. The ISM manufacturing data gives a detailed look at the manufacturing sector, how active it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. The Federal Reserve keeps a close watch on this report. Since 1970 the ISM manufacturing index has averaged 52.6, while since 1990 the index has averaged 51.1.

According to the ISM, "Manufacturing activity continued at a very positive rate in August 2010 as the PMI rose slightly when compared to July 2010. In terms of month-over-month improvement, the Production and Employment Indexes experienced the greatest gains, while new orders continued to grow but at a slightly slower rate. August represents the 13th consecutive month of growth in U.S. manufacturing".

The rapid growth in US manufacturing during late 2009 and early 2010 (which was evident as a global trend in manufacturing, including within South Africa), was mostly driven by a rebound in the inventory adjustment process and reflected as a surge in global trade. This has now played out in most economies including the US (and South Africa). The result is that manufacturing activity will generally appear to lose momentum in the second half of the year and into early 2011. The key to sustained growth in the US (and in fact globally) is now squarely on the shoulders of final demand. Growth in final demand (consumer and fixed investment spending) is realistically going to have to be driven by employment growth (income growth) and not credit growth, certainly during the next phase of the global recovery.

Download the presentation slides