US ISM Manufacturing Back in the Green

There was an increase to 51.5 from a previous reading of 49.4 in the US ISM Manufacturing Index for the month of September as the index finally enters expansion territory after it posted a decline in August. The reading was above the market’s anticipation for a growth of 50.4 but it was still below the July reading of 52.6. A reading of 51.5 will result in an annualized GDP growth rate of an estimated 2.6%, this was implied by the ISM. The data will provide some relief for the near term US manufacturing trends, but it is not likely to affect the Fed projections at this point.

There was a swift reversal in new orders as it rose from the previous reading of 49.1 to 55.1 as production is back in the green at 52.8 from the previous 49.6. Out of the 18 sectors, 9 reported a rise in orders for the month as 10 also reported a growth in production. There was relatively little movement in the inventories index, while order backlogs increased to 49.5 from 45.5 previously. US construction spending also fell 0.7% in the month of August, surrounded by expectations of a gain. Spending fell in all areas: housing, non-housing building, and public/government spending.

“The economy dodged a bullet where ISM manufacturing is no longer flashing the yellow caution light,” said Chris Rupkey, the chief financial economist at MUFG Union Bank.

“We need to see another decent month before we can be completely sure, but for now these data appear to support our view that the August drop was a fluke,” said Pantheon Macroeconomics’ chief economist Ian Shepherdson, “and that the combination of rebounding energy capex, stronger non-energy capex, and decent demand from both domestic consumer and overseas is supporting U.S. manufacturing. No boom, but no bust, either.”

There is however no major difference between a 49 reading and a 51 reading. Yes, being above that 50 level will soothe jangled nerves, and alleviate concerns. “Nevertheless, the index remains at a muted level and the other news today that construction spending contracted in both July and August shows that the factory sector is not the only misfiring part of the economy.”

Capital Economics has fixed the third-quarter GDP between 2-2.5%, though it pointed out that the 51.5 level on the manufacturing PMI was consistent with GDP growth of about 1.5%.

In the moments following the release, the US dollar did gain support following the data with EUR/USD edging down to 1.1215 from 1.1225 as USD/JPY rose to 101.50 from 101.40. US Treasuries extended losses with a decline of 6 ticks on the day, while US equity indices remained in negative territory. The overall reaction was much more subdued than that seen following last month’s slide into contraction.