ISM Manufacturing stays below 50 in July
The picture of a slowdown in the manufacturing sector did not change with the release of the ISM Manufacturing index for July. Thus, the gauge only rose marginally from 49.7 to 49.8 and thereby stayed at contractionary levels, which prior to last month has not been seen since July 2009. The consensus view was for an increase to 50.2. With the second consecutive reading below the boom/bust level of 50, it is clear that the slowing in demand from especially the euro area, but probably also from China, has made a dent in the otherwise strong manufacturing recovery. Today's figure could add to fears of a continued sluggish economy in the second half of the year. However, the figure still does not point to any risk of an outright recession, but underscores the current state of treading water for the world's largest economy. The reaction in markets will as such probably be relatively muted, albeit probably with a negative bias, as focus turns to this evening’s FOMC meeting.
New orders paint a bleak picture
The effect from the slowing global demand is especially evident in the index for new export orders, which fell further from 47.5 to 46.5 in July. Overall, the forward looking index of new orders paints a relatively dire picture, with the tepid increase from 47.8 to 48.0 not giving an encouraging outlook for business investments. This was further enhanced by an increase in the inventory index from 44.0 to 49.0. We can still hope that we are experiencing another soft spot in the economy, as seen in the summer of both 2010 and 2011, but looking at the order-to-inventory relationship, there is a clear risk of a more pronounced contraction in the manufacturing sector in the months ahead.
Still not enough for the Fed?
The still subdued ISM Manufacturing Index will probably add to speculation that we will see further accommodation from the Fed. However, as the index overall does not really change the view of a slow growing economy, we do not think that we will see any reaction at this evening's FOMC meeting. Surely, Bernanke will highlight the sluggishness of the economy and the press statement will most likely acknowledge that the economy is in a softer spot, but we still believe that the central bank will wait for more evidence on the state of the economy. With private consumption being the biggest component of the economy, it will probably take an even more sluggish job recovery to spur further action from the Fed. On that note, the employment index did, however, underscore the current sluggishness in job creation, with a drop from 56.6 to 52.5, which on past form is consistent with an outright contraction in manufacturing payrolls. As such we do not rule out a new round of QE being announced at the next meeting in September if the current weakness of the economy persists; however, as mentioned, we do not see any new measures being introduced tonight, which might come as a disappointment to some. We should also add that we are somewhat sceptical with regards to the effects on demand and credit growth of more QE given the already very low levels of bond yields.