ISM PMI declines in October; “unprecedented number of hurdles”

Summary: ISM PMI declines from 61.1% to 60.8% in October, slightly above consensus expectation; “unprecedented number of hurdles to meet increasing demand”; respondents “strongly optimistic”; latest reading implies 5.0% 12-month GDP growth rate in March.

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. Since then, readings have remained at elevated levels.

According to the ISM’s October survey, its PMI recorded a reading of 60.8%, slightly above the generally expected figure of 60.3% but a little lower than September’s 61.1%. The average reading since 1948 is 53.0% and any reading above 50% implies an expansion in the US manufacturing sector relative to the previous month.

“Business Survey Committee panellists reported that their companies and suppliers continue to deal with an unprecedented number of hurdles to meet increasing demand,” said Timothy Fiore, Chair of the ISM’s Manufacturing Business Survey Committee.

US Treasury bond yields remained stable on the day except at the ultra-long end where they rose moderately. By the close of business, 2-year and 10-year Treasury bond yields had returned to their starting points at 0.50% and 1.56% respectively while the 30-year yield finished 3bps higher at 1.96%.

Fiore noted respondents continued to be “strongly optimistic, with four positive growth comments for every cautious comment.”

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, October’s PMI corresponds to an annualised growth rate of 5.0%, or 1.2% over a quarter. Regression analysis on a year-on-year basis suggests a 12-month GDP growth rate of 5.0% 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 IHS Markit October flash manufacturing PMI registered 59.2%, 1.3 percentage points lower than September’s final figure.

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