The surprising fall of the ISM index below the 50-threshold in May was reversed in June, as the rebound in production and new orders components drove the improvement. Price pressures remain very limited, which should help supporting firms’ profitability. The global environment remains unfavourable, but domestic demand is a brightening spot.
After temporarily falling below the 50-threshold, the ISM manufacturing index bounced back to 50.9 in June. The improvement was led by the components for production and new orders, respectively up from 48.6 to 53.4 and from 48.8 to 51.9.
Manufacturing sentiment has been everything but stable recently, as headwinds and tailwinds compete for the lead. Tailwinds are mainly coming from the markedly better prospects for the US final domestic demand, as both the housing and the labour market now support households’ wealth, revenue and confidence. Input prices are also another cause for optimism, as illustrated by the prices index of the ISM that, even if slightly up in June, remains well below its average since the economy emerged from recession (at 52.5). Furthermore, inventories are lean (the index was 50.5 in June), meaning that growing demand will rapidly be met thanks to increased production (versus a cut in inventories).
As for headwinds, the slowdown in some major emerging countries now comes on top on the enduring recession in the eurozone. Data published this morning however point to some optimism on the European front, as manufacturing PMIs improved substantially in Italy and Spain.
As the US manufacturing sector recorded a remarkable improvement in competitiveness, it should not record too mark a fall in market shares. It is however unlikely that it can grow thanks to exports, and prospects for domestic business investment are key.
As the financial situation of the corporate sector is very healthy, and financial conditions remain very easy, in spite of the recent increase in bond yields, there are reasons for optimism.
BY Alexandra ESTIOT
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