"Demand-driven, supply chain-constrained environment": ISM November PMI

Summary: ISM PMI increases from 60.8% to 61.1% in November, in line with consensus expectation; “demand-driven, supply chain-constrained environment”; manufacturing sector “still expanding very strongly”; latest reading implies 5.1% 12-month US GDP growth rate in April.

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 November survey, its PMI recorded a reading of 61.1%, basically in line with the generally expected figure of 61.0% but a little higher than October’s 60.8%. 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.

“The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment, with some indications of slight labour and supplier-delivery improvement,” said Timothy Fiore, Chair of the ISM’s Manufacturing Business Survey Committee.

The report was released on the same day as the latest ADP employment report and US Treasury yields moved lower on the day. By the close of business, the 2-year Treasury bond yield had slipped 1bp to 0.55%, the 10-year yield had shed 4bps to 1.41% while the 30-year yield finished 5bps lower at 1.74%.

In terms of US Fed policy, expectations of any change in the federal funds rate over the next 12 months firmed a little more in favour of earlier rate rises. Federal funds futures contracts for December 2022 implied an effective federal funds rate of 0.61%, 53bps above the current spot rate.

“Though back from the mid-60s in March this year, levels above 60 nevertheless remain very strong in a historical context and suggest the sector is still expanding very strongly,” said Ray Attrill, NAB’s Head of FX Strategy within its FICC division. 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.”  

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, November’s PMI corresponds to an annualised growth rate of 5.1%, or 1.3% over a quarter. Regression analysis on a year-on-year basis suggests a 12-month GDP growth rate of 5.1% 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 November flash manufacturing PMI registered 59.1%, 0.7 percentage points higher than October’s final figure.

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