The ISM Survey of the US manufacturing sector (published on Monday) offers the first reliable glimpse of activity in the US economy in the third quarter of the year. It is not encouraging.
Although the headline reading was rather better than widely anticipated (an out-turn of 55.5 compared to 56.2 in June), the details of the survey showed that new orders are now slowing markedly, and inventories have started to rise more rapidly than companies may be intending. Taken together with the GDP data for Q2 (discussed in an earlier blog), the ISM survey points to a significant danger that the US economy will continue to slow sharply in the months ahead.
The ISM surveys in the US are among the few items of monthly information which are capable of moulding market sentiment in a profound way. This is because they have an excellent track record of picking up changes in trend in US activity, because they are never revised, and because they are published earlier than most other data series on the economy.
The manufacturing survey tends to get the most attention, because it comes out first, and because it has a much longer series of historical data, than the non manufacturing series. In fact, it would be only a slight exaggeration to say that once the ISM series are published, very little else is likely to change market psychology on the course of the economy during the coming month. (OK, I accept that the employment data which are due on Friday will often do so, but very little else will.)
The headline figure for the manufacturing sector in July had been expected to fall to about 54.5, but in fact it fell only to 55.5, down by 0.7 on the previous month. Although superficially encouraging, the details lying behind the headlines were much worse than expected.
Economists tend to track two series in particular, because they can be combined to provide a useful leading indicator for the manufacturing sector in the months ahead. The first of the key series is new orders, which this month fell by a horrible 5 points to 53.5. This speaks for itself. The second is inventories, which rose by 4.4 points in July, suggesting that companies may have been forced to build their stock holdings because they have not been able to maintain their sales at expected levels. The difference between new orders and inventories, which is the leading indicator mentioned above, therefore plummeted by 9.4 points this month (see graph). Although this can be a somewhat volatile series on a monthly basis, the underlying trend in the series (also shown in the graph) is now definitely headed downwards.
It is surprising to me that the stock market has so far been so resilient in the face of the mounting weight of evidence that growth rate in the US economy has dipped below trend, with no knowing where this will end.
