Fed warming up the printers? US manufacturing activity contracted in June
June’s US ISM manufacturing survey was much weaker than expected and will likely add to the concern that the US economy is not able to continue decoupling from other major economies. Hence it is clearly a negative for investor confidence, although expectations of more easing from the Fed (QE3) are likely to increase.
The ISM manufacturing index fell to 49.7 in June from 53.5 a month earlier, much weaker than the consensus forecast of 52 (Nordea: 52.5) and consistent with falling manufacturing output for the first time since July 2009. However, it is worth remembering that the ISM index needs to fall below 45 to be consistent with recession in the overall economy.i
The biggest surprise was a huge drop in the key forward-looking new orders index, from 60.1 (very strong growth) to 47.8 points, the steepest decline since the Lehman crisis into the contraction zone. On the other hand, the employment component remained at high ground: 56.6 – a very slight drop from 56.9 last month, and well in the growth zone. I therefore stick to my forecast of a 60k increase in nonfarm payrolls in Friday’s employment report.
Overall, the conflicting signals from the new orders and employment indices suggests that we should take today’s manufacturing survey with more than a grain of salt as the risk of at least some noise seems real. However, if the much weaker-than-expected survey is supported by other data releases in coming days and weeks I will have to reconsider my otherwise cautiously optimistic outlook for the US economy, see The US: Summertime blues, but nothing more.
For now, I expect the ISM index soon to rebound as the recent sharp drop in oil prices is fully reflected in demand and concern of a break-up of the Euro is reduced.
Soft June ISM manufacturing survey (click to enlarge)