US manufacturing goes from strength to strength

While it isn’t the most important event or even most important data release this week, the strength of the ISM manufacturing report is a very positive signal and underlines the robust performance of the sector at the beginning of the quarter. The headline rose to 59.3, the best outcome since September 2018, well above both the 56.0 consensus and September’s 55.4 reading.

New orders rose to 67.9 from 60.2, leaving it at its highest level since 2004 while production rose to 63 from 61. With customer inventories continuing to be run down - currently, at a decade low of 36.7 - this suggests ongoing healthy gains for orders and output in coming months. This in turn should be good news for ongoing employment growth – the employment component rose to its highest level since June 2019.

There are a couple of notes of caution. Firstly, this is a diffusion survey so merely measures the relative proportion of firms experiencing expansion or contraction. We don’t know if firms are experiencing output gains of 100% or 0.1%, just that activity is rising. This uncertainty is reflected in the chart below where the actual output as measured by the Federal Reserve is still lagging well behind where the ISM suggests we are.

The second point is that we have to acknowledge that rising Covid-19 cases remain a threat to the economic outlook. Rising infections rates and hospitalisations are leading to severe lockdown measures in Europe and we can’t rule out that happening in the US at some point. That said, European factories are largely remaining open with service sector companies much more adversely impacted. We would imagine that should individual states in the US feel compelled to take action we will see a similar response. This would allow the manufacturing sector to be relatively resilient, particularly with such low inventory levels.