Summary: ISM PMI rises from 59.5% to 59.9% in August, slightly above consensus expectation; businesses struggling to meet increasing demand; all segments impacted; worst behind in terms of input cost pressures; latest reading implies 4.8% 12-month GDP growth rate in January.
The Institute of Supply Management (ISM) 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. Since then, readings have remained at elevated levels.
According to the ISM’s latest survey, its Purchasing Managers Index recorded a reading of 59.9% in August. The result was slightly above the generally expected figure of 58.7% and July’s reading of 59.5%. The average reading since 1948 is 52.9% and any reading above 50% implies an expansion in the US manufacturing sector relative to the previous month.
The ISM’s Timothy Fiore again noted businesses were struggling to meet increasing demand. “All segments of the manufacturing economy are impacted by record-long raw-materials lead times, continued shortages of critical basic materials, rising commodities prices and difficulties in transporting products.”
Longer-term US Treasury yields crept a little lower on the day. By the close of business, 10-year and 30-year Treasury bond yields had each slipped 1bp to 1.30% and 1.92% respectively. The 2-year yield finished unchanged at 0.21%.
Fiore said increased COVID infections “are adding to pandemic-related issues” which “continue to limit manufacturing-growth potential.” He pointed to employee absences due to confinement, part shortages and employee shortages in general as limiting factors.
NAB currency strategist Rodrigo Catril made an interesting observation. He noted the prices-paid sub-index eased and, while it was still at an elevated level, it “could be suggesting the worst is behind in terms of input cost pressures.”
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. According to the ISM, a reading “above 42.8%, over a period of time, generally indicates an expansion of the overall economy.”
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 growth rate of 4.8%, or 1.2% over a quarter. Regression analysis on a year-on-year basis also suggests a 12-month GDP growth rate of 4.8% five months after this latest report.
The ISM index is one of two monthly US PMIs, the other being an index published by IHS Markit. IHS Markit also produces a “flash” estimate in the last week of each month which comes out about a week and a half before the ISM index is published. The August flash manufacturing PMI registered 61.2%, 2.2 percentage points lower than July’s final figure.