ISM Manufacturing PMI Preview: Industrial construction boom set to lift US Dollar

• Economists expect the ISM Manufacturing PMI to edge up to 47.8 in September. 
• Government-induced construction of new factories may boost morale among those surveyed. 
• The US Dollar remains in an uptrend and could kick off October with another leg higher. 

US factories are rising like a phoenix – not by mystical powers but by massive government spending. This construction boom has yet to lift output, triggering a meaningful increase in the ISM Manufacturing Purchasing Managers' Index (PMI), a forward-looking indicator of sentiment. This may change, with a positive outcome  for the US Dollar.

Here is a preview of the ISM Manufacturing PMI for September, due on Monday at 14:00 GMT.

ISM Manufacturing PMI leads the way

Purchasing managers' current opinions impact the economy shortly after – that is the logic behind ISM's monthly surveys. Markets closely watch these figures, especially when they are released ahead of the Nonfarm Payrolls report, thus serving as a leading indicator. 

While the manufacturing sector is smaller than the services sector, the early release of the factory-related PMI sets the tone and impacts estimates for the Services PMI. 

In the recent past, the industrial sector has suffered from the post-covid reopening trend – a return to consuming experiences, or services, rather than buying finished goods. The ISM Manufacturing PMI has been under 50, the threshold separating expansion from contraction, for 10 consecutive months
 

ISM Manufacturing PMI. Source: FXStreet

Nevertheless, there are signs the decline is bottoming out, and for three good reasons – three massive government plans. A bipartisan infrastructure bill, the CHIPS Act, (which encourages producing microchips in the US) and the Inflation Reduction Act (IRA), which mostly incentivizes the transition to green energy. These programs have mobilized significant private-sector investment. 

The IRA may not contribute to lowering inflation – pouring money does not tend to have that impact – but it turbo-charged manufacturing construction spending:

Total Construction Spending: Manufacturing. Source: St. Louis Fed

The output boom is likely in 2024, despite rate hikes from the Federal Reserve (Fed). As a forward-looking indicator, soft data such as the ISM Manufacturing PMI may begin moving already now.

Economists expect only a minor increase from 47.6 to 47.8 for September. That may be too modest. 

Growing Sino-American and Sino-European tensions encourage more friend-shoring – producing goods at home or in like-minded countries. This change in trend will also likely raise expectations at manufacturers. 

ISM Manufacturing PMI and the US Dollar

Currencies react to changes in interest rates, but every figure can trigger considerable price action when the Federal Reserve stresses that its next actions depend on the data – like now. The ISM Manufacturing PMI is the first release of a week that culminates in the all-important Nonfarm Payrolls, which is set to rock markets. 

In recent weeks, the trend has been in favor of the US Dollar (USD), which gained ground in response to positive economic data and the Fed's hawkish stance. The bank left the door open for another rate hike in 2023 and its estimates for 2024 have been substantially upgraded.

I expect US Dollar resilience to continue in the first trading day of October unless the ISM Manufacturing PMI badly disappoints with a drop toward 45. An expected outcome or a better one – as I expect – would fuel further US Dollar strength. 
 

Final thoughts

The ISM Manufacturing PMI is a significant market mover, and the industrial construction boom will likely lift the outcome – and the US Dollar.