Tuesday, August 2, 2011

Awful US manufacturing data

The Institute of Supply Management US manufacturing PMI came in at 50.9 in July, a 4.4 point drop on June and well below market expectations. Most worrying was the decline in the New Orders Index to 49.2, down from 51.6 in June.

No matter which way you look at it, this is an awful result. It comes hot on the heels of weaker than expected Q2 GDP data which was accompanied by around 1 percentage point of downward revisions to historical growth estimates. Europe is going through a similar soft patch.

Much has been made of the apparent transitory reasons for some of the recent weakness: supply-chain disruptions on the back of the Japan earthquake in particular. But as we have commented previously, there is more to it than that.

There are a couple of straws to clutch. It’s good news that the Inventories index also dipped below 50 to 49.3. It is possible to construct a not unreasonable scenario that recent demand has been met out of inventories but firms have delayed pushing the button on new orders in the face of uncertainty around the raising of the US debt ceiling.

Other good news was the Prices Paid index dropped 9 points from 68.0 to 59.0. Some relief is coming thru on the commodity price front which is good for profitability and investment and hiring. Combine that with the fact that business investment was still strong in the otherwise weak GDP data that bodes well for a pick-up in growth later. It’s also good news that both the imports and exports indices were up.