The US ISM manufacturing report declined more than expected to 56.6 (consensus: 58.5) from 59.0 in August. The details were also on the soft side.
ISM reached very high levels over the summer and it is only natural that we see some moderation in line with growth expectations of 3-3.5% growth in H2 down from the 4.5% pace in Q2. Indeed, ISM is likely to have overshot on the upside, which is partly why we see a correction lower. We expect ISM to fall a bit further in the coming months.
With weakness in all other regions of the world and the USD strengthening rapidly, it was a matter of time before ISM manufacturing came down from the very high level as the manufacturing sector is the most exposed to export markets. Overall, domestic demand in US is still strong and we expect continued robust growth. But it is likely that data will surprise a bit on the downside in the short term as expectations have generally been raised a lot and our models point to a moderation in growth.
Details of the report: the new orders index fell to 60.0 from 66.7 and export orders fell to 53.5 from 55.0. Inventories also slipped a bit to 51.5 from 52.0 but as orders fell more, the order-inventory balance also deteriorated and points to more downside risk in the short term. The backlog of orders fell to 47.0 from 52.5, the lowest level since mid-2013. The production index actually increased to 64.6 from 64.5 but this index lags a bit and is likely to go lower next month weighing further on the overall ISM index.
The employment index dropped to 54.6 from 58.1, which points to around flat manufacturing payrolls. This is in line with the picture in the August non-farm payrolls, so this sector should be fairly neutral in Friday's job report for September.
The comments in the report are still quite positive in line with a still positive underlying picture (see bottom of mail).
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