ISM PMI up in January, above expectations; US manufacturing continues contraction at marginal rate; US Treasury yields fall, especially at long end; expectations of Fed rate cuts in 2024 barely change; ISM: reading corresponds to 1.9% US GDP growth 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 then declined fairly steadily until mid-2023.
According to the ISM’s January survey, its PMI recorded a reading of 49.1%, above the generally expected figure of 47.3% as well as December’s revised reading of 47.1%. The average reading since 1948 is roughly 53.0% and any reading below 50% implies a contraction in the US manufacturing sector relative to the previous month.
“The US manufacturing sector continued to contract, though at a marginal rate compared to December. Demand improved, output remained stable and inputs are accommodative,” said Timothy Fiore of the ISM Manufacturing Business Survey Committee.
US Treasury yields fell on the day, especially at the long end of the yield curve. By the close of business, the 2-year Treasury bond yield had lost 4bps to 4.20%, the 10-year yield had shed 11bps to 3.86% while the 30-year yield finished 13bps lower at 4.10%.
In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months barely changed. At the close of business, contracts implied the effective federal funds rate would average 5.32% in February, essentially in line with the current spot rate, 5.285% in March and 5.225% in April. However, January 2025 contracts implied 3.835%, 150bps less than the current rate.
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, January’s PMI corresponds to an annualised growth rate of 1.9%, or 0.5% over a quarter. Regression analysis on a year-on-year basis suggests a 12-month GDP growth rate of 2.2% 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 January manufacturing PMI registered 50.3%, up 2.4 percentage points from December’s final figure.