by Even though the ISM Manufacturing index remains stuck at quite low levels, we continue to expect GDP growth to reach 2.0% q-o-q annualised in Q1 and 2.0% as well on average in 2016. The ISM Manufacturing index bounced back a little in February, but its Non-Manufacturing counterpart eased marginally. We don’t see any reason to alter our growth scenario. Our forecast that GDP will grow by 2.0% in Q1 and 2.0% overall in 2016 remains unchanged. ISM Manufacturing index bounced back in February The ISM Manufacturing survey for February 2016 was published on Tuesday. The headline reading bounced back further from 48.2 in January to a five-month high of 49.5 in February, above consensus expectations (48.5). Nevertheless, this yardstick remained pitched at quite a low level (see chart above). The number recorded two months ago was the lowest since the recession ended in June 2009. As things stand, the Markit Manufacturing PMI (reflecting results from the other main survey on manufacturing activity) remains above its ISM counterpart, although it dropped back m-o-m, from 52.4 in January to 51.3 in February. The details of the Manufacturing ISM report showed that the Employment sub-index rebounded from 45.9 in January – its lowest level since June 2009 – to 48.5 in February, whilst the Production sub-index increased from 50.2 in January to 52.8 in February.
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Even though the ISM Manufacturing index remains stuck at quite low levels, we continue to expect GDP growth to reach 2.0% q-o-q annualised in Q1 and 2.0% as well on average in 2016.
The ISM Manufacturing index bounced back a little in February, but its Non-Manufacturing counterpart eased marginally. We don’t see any reason to alter our growth scenario. Our forecast that GDP will grow by 2.0% in Q1 and 2.0% overall in 2016 remains unchanged.
ISM Manufacturing index bounced back in February
The ISM Manufacturing survey for February 2016 was published on Tuesday. The headline reading bounced back further from 48.2 in January to a five-month high of 49.5 in February, above consensus expectations (48.5). Nevertheless, this yardstick remained pitched at quite a low level (see chart above). The number recorded two months ago was the lowest since the recession ended in June 2009. As things stand, the Markit Manufacturing PMI (reflecting results from the other main survey on manufacturing activity) remains above its ISM counterpart, although it dropped back m-o-m, from 52.4 in January to 51.3 in February.
The details of the Manufacturing ISM report showed that the Employment sub-index rebounded from 45.9 in January – its lowest level since June 2009 – to 48.5 in February, whilst the Production sub-index increased from 50.2 in January to 52.8 in February. The New Orders sub-index – which is supposed to be the most forward-looking component of the survey – remained unchanged at 51.5. However, it had bounced back noticeably m-o-m in January (from 48.8 in December). Encouragingly, the sub-index measuring firms’ assessment of the level of their customers’ inventories fell markedly from 51.5 to 47.0, suggesting the ongoing inventory adjustment may be approaching its end.
Although certainly reassuring, last month’s rebound in the ISM index should not be overstated. This index remains pitched below the 50-point threshold, actually for the fifth month in a row now. And we don’t expect any meaningful recovery in the manufacturing sector, at least not in the short run. As we have noticed repeatedly, the combined effect of low oil prices, soft foreign demand and a higher dollar was – and will over the coming months continue to be – a clear, sharp negative factor for the manufacturing sector, which is much more dependent on exports and the oil-extraction sector than the whole services-oriented economy. Fortunately, the manufacturing sector accounts for only some 12% of the overall US economy.
ISM Non-Manufacturing index eased marginally
The ISM Non-Manufacturing survey was published today. The headline index eased further marginally from 53.5 in January to 53.4 in February, slightly above consensus expectations (53.1). Although a sizeable fall was recorded over the past four months (see chart on previous page), this yardstick remains pitched at still relatively healthy level by historical standards.
The sub-index for Business Activity bounced back markedly from 53.9 in January to 57.8 in February. However, this was slightly more than compensated by lower readings on other sub-indices. The Employment sub-index dropped from 52.1 in January to 49.7 in February and the New Orders sub-index declined from 56.5 in January to 55.5 in February.
Taken together, the two ISM indices suggest that overall economic growth has slowed significantly over the past few months. However, if we use historical correspondence to try to calibrate what the ISM indices are pointing towards in terms of GDP growth (see chart above), we arrive at 1.7% in January-February, not such a low reading in itself, but a much lower number than was registered on average in Q4 (2.7%) and Q3 (3.3%). Nevertheless, although ISM surveys are timely and useful indicators of the strength in the economy, they are not very reliable at forecasting GDP growth in the short run. Indeed, as we have just seen, ISM indices had been pointing to 2.7% GDP growth in Q4 whereas the second estimate published last week for this was a meagre 1.0%.
Other data published so far this week were mixed
Overall, February’s ISM surveys were mixed, with a slight improvement in the Manufacturing index, but not for its Non-Manufacturing counterpart. The other economic statistics published so far this week were also mixed. Although auto sales remained pitched at healthy absolute levels in February (17.5 million, annualised), they were flat m-o-m (-0.2%) and, overall in January-February, they settled 2.0% (non-annualised) below the average level recorded in Q4. Meanwhile, January’s pending home sales surprised on the downside. On the other hand, construction spending numbers for January were surprisingly robust. Construction spending rose by a strong 1.5% m-o-m, whereas consensus estimates suggested only a meagre 0.3% increase. And figures for the previous months were revised up. Moreover, the ADP measure of private-sector job creation in February was published at an above-expectation robust 214,000, auguring well for tomorrow’s employment report.
Following the publication of the data mentioned above, we don’t see any reason to alter our forecasts. For the time being, we continue to expect GDP growth to reach 2.0% q-o-q annualised in Q1 and 2.0% as well on average in 2016.