US ISM Manufacturing and Factory Orders

ISM manufacturing PMI fell into contraction unexpectedly on Monday as new orders slid in June (see Exhibit 1)—overall, ISM manufacturing PMI fell -3.8 points to 49.7 versus Bloomberg consensus expectations for 52.0 (readings over 50 indicate growth).

Exhibit 1: ISM Manufacturing PMI

Source: ISM.

The new order index fell sharply, helping push the PMI into contraction. But while a reading of less than 50 indicates manufacturing contraction, a reading greater than 42.6 typically means the broad economy is still expanding, according to ISM. It is also normal for the PMI to dip below 50 during broad expansions (see Exhibit 2). Many of the anecdotal comments from ISM survey respondents were positive and dismissed recent weakness in data, though they noted continued uncertainty and weak pricing. Manufacturers nevertheless continued hiring, and the production index remained slightly expansionary—signs this needn’t be more than a temporary slowdown.

Exhibit 2: ISM Manufacturing Index

Sources: ISM, NBER and Thomson Reuters.

Further arguing against an imminent slowdown, Tuesday brought reports factory orders rebounded faster than expected in May, rising +0.7% month over month (+3.0% y/y) versus expectations for only a +0.1% m/m increase—the first time orders have gained in three months. Orders for core capital goods and durable goods in general rose faster than initially reported in the advance release.

Though it is too soon to truly tell, it seems likely the recent slowdown in manufacturing could prove to be normal volatility. With expectations still very dour, there would seem to be reasonable prospects for more upside surprise in manufacturing moving forward.