The ISM Surprises On The Upside
BNP Paribas | Sep 04, 2013 06:55AM ET
The manufacturing sentiment once more improved in August. After a surge in July, a set-back was expected but did not materialise. In particular, new orders are incredibly well oriented, gaining more than 14 points in just three months. Whether the improvement recorded by the manufacturing ISM during the summer will turn to be the one, only history will tell.
In July, the manufacturing ISM survey had showed a surprisingly strong improvement in sentiment, calling for a correction in August. This did not happen, as the composite index hardly moved, at 55.7 (after 55.4).
While components for production and employment were slightly down (from 65.0 to 62.4, and from 54.4 to 53.3, respectively), the other sub-indices were up enough to offset these moves.
The marked increase in new orders, up 14.4 points in three months to 63.2 (its highest reading since April 2011), is particularly good news, an improvement that probably comes both from domestic and external demand, as new export orders gained 2 points in August.
Since the US economy emerged from recession, this is far from the first time that business confidence indices announce a marked recovery. As for now, this failed to happen. The US economy may experience decent growth, but this is far from enough to close the output gap.
Whether the improvement recorded by the manufacturing ISM during the summer will turn to be the one, only history will tell. On the one hand, the fact that this manufacturing revival is felt also in Europe is a source of optimism. On the other hand, it could well be just one of these mini-cycles already observed, as the turmoil in emerging financial markets may hurt growth there and US exports in turn.
Additionally, there is no fundamental reason for optimism. US households still have to weather quite a harsh fiscal adjustment, meaning that the only source of acceleration is the domestic business sector. As it seats on a large pile of cash, its ability to finance an investment boom is unquestionable. As for its willingness…. Prospects for demand will be key. And as for now, they still are uncertain.
BY Alexandra ESTIOT
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