Summary: ISM PMI up in July, below expectations; marginally slower rate of contraction; US Treasury yields rise noticeably; expectations of Fed rate cuts in 2024 soften slightly; ANZ: manufacturing struggling, upstream goods inflation soft; ISM: reading corresponds to 0.8% 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 July survey, its PMI recorded a reading of 46.0%, below the generally expected figure of 46.9% but up slightly from June’s 46.0%. 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.
“The US manufacturing sector shrank again but the uptick in the PMI indicates a marginally slower rate of contraction,” said Timothy Fiore, Chair of the ISM’s Manufacturing Business Survey Committee.
The figures were released on the same day as the latest JOLTS report and US Treasury yields finished the day noticeably higher. By the close of business, the 2-year Treasury bond yields had added 6bps to 4.91%, the 10-year yield had gained 7bps to 4.03% while the 30-year yield finished 8bps higher at 4.09%.
In terms of US Fed policy, expectations of a lower federal funds rate in the first half of 2024 softened a touch. At the close of business, contracts implied the effective federal funds rate would average 5.33% in August, in line with the current spot rate, and then increase to an average of 5.345% in September. December futures contracts implied a 5.40% average effective federal funds rate while July 2024 contracts implied 4.905%, 42bps less than the current rate.
“All in all, these data suggest manufacturing continues to struggle and that upstream goods inflation remains soft,” said ANZ economist Kishti Sen.
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, July’s PMI corresponds to an annualised contraction rate of 0.8%, or about 0.2% over a quarter. However, regression analysis on a year-on-year basis still suggests a 12-month GDP growth rate of 1.5% 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 July manufacturing PMI registered 49.0%, 2.7 percentage points higher than June’s final figure.