US: ISM to Continue Lower

• ISM fell less than expected in April to 60.4 (consensus 59.5) from 61.2 in March. However, a decline in new orders for the second consecutive month means the overall tone of the report was fairly neutral.
• ISM is still at a very high level, pointing to strong activity in the manufacturing sector. This is not mirrored in the hard data, though, which are showing less vibrant growth.
• We expect a further decline in ISM in the coming months as headwinds from oil and weaker growth in Asia should dampen growth in the industry sector.

Details

The new orders index fell to 61.7 in April from 63.3 in March. This was the second month of decline. The inventories index rose to 53.6 from 47.4 and hence the inventory order index deteriorated further in April, supporting the expectation of further slowing in the pipeline in coming months. The export orders index rose to 62.9 from 56.0, suggesting a rebound in export growth in Q2 following some softness in Q1.

The production index fell to 63.8 from 69.0, painting a similar picture of slower but still decent production growth.

The employment index fell slightly to 62.7 from 63.0. It therefore stayed close to a very high level, pointing to continued job creation in the manufacturing sector. However, employment growth has not been quite as robust as suggested by the ISM employment index recently. Also, job creation in manufacturing is not hugely important as 70% of jobs are in the service sector.

The prices paid index rose slightly to 85.5 from 85.0, pointing to continued price pressure from input prices. This mirrors the strong increase in commodity prices. However, as long as unemployment is very high and wage growth low this is unlikely to trigger widespread inflation. However, it should underpin the bottoming of core inflation from the subdued levels we are currently seeing.

Assessment and outlook

The decline in ISM is likely to continue in coming months as headwinds have piled up recently from higher oil prices and apparent weakening of Chinese industry, as signalled by lower Chinese PMI. We expect the decline to be orderly and reach 55 by the autumn, but there is still a risk of a faster decline. Also note that ISM is actually at a much higher level than hard data for industrial production. This suggests it may not represent the whole economy. It may be because it has a bias towards larger enterprises, which benefit more from the growth in Emerging Markets.