Summary: ISM PMI up in September, above expectations; NAB: US manufacturing may be stabilising; US Treasury yields significantly higher; expectations of Fed rate cuts in next 12 months soften; ANZ: worst of manufacturing headwinds dissipating; ISM: reading corresponds to 0.1% US GDP contraction annualised.
The Institute of Supply Management (ISM) manufacturing Purchasing Managers Index (PMI) reached a cyclical peak in September 2017. It then started a downtrend which ended in March 2020 with a contraction in US manufacturing which lasted until June 2020. Subsequent month’s readings implied growth had resumed, with the index becoming stronger through to March 2021. Readings have since declined fairly steadily.
According to the ISM’s September survey, its PMI recorded a reading of 49.0%, above the generally expected figure of 47.8% as well as August’s 47.6%. The average reading since 1948 is 53.0% and any reading below 50% implies a contraction in the US manufacturing sector relative to the previous month.
“Overall, the report is consistent with the narrative that manufacturing may be stabilising after the initial hit from higher rates,” said NAB Head of Markets Strategy Skye Masters.
US Treasury yields finished the day significantly higher. By the close of business, the 2-year Treasury bond yield had added 6bps to 5.11%, the 10-year yield had gained 10bps to 4.68% while the 30-year yield finished 8bps higher at 4.79%.
In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months softened. At the close of business, contracts implied the effective federal funds rate would average 5.40% in November, 7bps more than the current spot rate, 5.435% in December and 5.46% in January. September 2024 contracts implied 5.075%, 25bps less than the current rate.
“This highlighted a degree of resilience in the domestic economy despite the FOMC’s cumulative 525bps rise in policy rates,” said ANZ senior economist Catherine Birch. “The report suggested the worst of the headwinds affecting the manufacturing sector are dissipating.”
Purchasing managers’ indices (PMIs) are economic indicators derived from monthly surveys of executives in private-sector companies. They are diffusion indices, which means a reading of 50% represents no change from the previous period, while a reading under 50% implies respondents reported a deterioration on average. A reading “above 48.7%, over a period of time, generally indicates an expansion of the overall economy”, according to the ISM.
The ISM’s manufacturing PMI figures appear to lead US GDP by several months despite a considerable error in any given month. The chart below shows US GDP on a “year on year” basis (and not the BEA annualised basis) against US GDP implied by monthly PMI figures.
According to the ISM and its analysis of past relationships between the PMI and US GDP, September’s PMI corresponds to an annualised expansion rate of 0.1%, or about zero over a quarter. However, regression analysis on a year-on-year basis still suggests a 12-month GDP growth rate of 2.1% five months after this latest report.
The ISM index is one of two monthly US PMIs, the other being an index published by S&P Global. S&P Global produces a “flash” estimate in the last week of each month which comes out about a week before the ISM index is published. The S&P Global flash September manufacturing PMI registered 48.9%, 1.0 percentage points higher than August’s final figure.