Monday, August 2, 2010

The Message From the July ISM

The modest decline in the July ISM for manufacturing to 55.5 from 56.2 was hardly surprising, given the somewhat erratic tone of the other three regional manufacturing surveys so far (Philly Fed. Empire State, Chicago). Still it renders itself to a few observations.

Source: Bloomberg, Haver Analytics

The index, although it has retreated in the last few months from its cycle peak of 60.2 in April, remains at historically healthy levels. In fact, the mid-50s range for the ISM is decidedly above the levels that prevailed for the series in the two-year period of 2006-07 prior to the recession.

Some pullback from the spring levels was nearly inevitable, as the inventory replenishment cycle in the manufacturing sector is winding down. It is also true that a much-publicized pick-up in auto production in the last three months may have helped cushion the ISM's retrenchment during that period, in the wake of the waning push from inventories. So, as auto production has already probably peaked, the behavior of the series in the next couple of months could be quite telling of the remaining underlying momentum in manufacturing.

On that score, our expectation is that the ISM will probably dip a little lower into the fall months to the 53.0-54.0 area, as it will receive some support from the seemingly stronger than previously anticipated growth in Europe. The key point is that ISM levels in that range should still be viewed as consistent with a healthy manufacturing sector and an economic recovery plowing ahead.

Anthony Karydakis