US: ISM manufacturing has stabilised at weak level

• ISM manufacturing increased slightly to 48.2. in January from 48.0 in December (revised down from 48.2). We and consensus had expected a slightly better print (48.5) but today’s release confirms that ISM manufacturing has stabilised although at a weak level. This was still positive as some of the regional indices (Empire and Dallas) pointed towards a sharp decline. Also Markit PMI manufacturing has stabilised but at a higher level above 50.

• We expect ISM manufacturing has hit bottom and expect the index to rebound slightly in the coming months. However, the index will likely stay weak as the manufacturing sector still suffers from a combination of the very strong USD, the slowdown in manufacturing globally (especially in China) and the lower activity in the US energy sector. The risk to the economy is that there will be negative contagion effects on the non-manufacturing sectors. 

• Some important subcomponents were better than headline. New orders, which usually leads the headline index, increased to 51.5 in January from 48.8 in December, the strongest since August 15. The increase in orders was driven by domestic demand as new export orders declined sharply from 51.0 to 47.0. Production slightly up to 50.2 in January from 49.9 in December. The order-inventory balance indicates that ISM manufacturing should increase slightly towards 50.

• The employment subcomponent declined to 45.9, which was the lowest since August 2009. Manufacturing employment has stayed more or less unchanged in recent months despite the weak manufacturing activity data. That said, the current level of the employment subcomponent indicates that manufacturing employment declined by 15,000 in January. The fit has been weak though.

• While the ISM manufacturing index is important for market sentiment, we think Fed will put more weight on the ISM non-manufacturing index due on Wednesday as it accounts for a larger share of the economy. In 2014 manufacturing only accounted for close to 14% of gross value added in the US while services and construction together accounted for nearly 82%. Employment within services accounts for over 86% of total nonfarm payrolls while employment within manufacturing accounts for only 9%.

• Besides the release of ISM non-manufacturing on Wednesday, eyes are on the January jobs report on Friday. We expect non-farm payroll increased 200,000 (consensus: 190,000). That said, a weak jobs report will likely weigh on risk sentiment as the financial market turmoil in the beginning of the year partly reflects US growth concerns. A strong jobs report could calm markets and Fed as it would indicate a solid underlying growth trend in the US.

ISM manufacturing has stabilised at weak level. ISM non-manufacturing due on Wednesday

Good news that new orders increased in January - highest since August 2015

Order-inventory balance suggets a small increase in ISM

Both ISM manufacturing and Markit PMI manufacturing have stabilised

ISM manufacturing vs manufacturing production

Employment subcomponent weakest sicne August 2009