ISM manufacturing PMI Preview: Expected slowdown in manufacturing activity and prices paid unalters Fed’s take on rates

• The ISM manufacturing PMI is expected to slow down with the economic activity continuously rising for the 112th month in a row.
• The prices paid sub-index is also expected to ease, copying the headline PMI index with a reading of 70.0 in August.

The economic activity in the manufacturing sector of the US economy is expected to have expanded in August for the 112th consecutive month with ISM’s manufacturing PMI at 57.7 for August, the US  supply executives are expected to say in the latest report due on Tuesday, September 4 at 14:00 GMT.

The economic activity in the US has been generally boosted by Trump’s administration launching massive tax reform last year that is together with the economy-supporting environment of low-interest rates very favorable for the economic activity in both sectors, the manufacturing and in services.

The US Gross Domestic Product increased 4.1% in the second quarter this year, matching the market estimates while being supported by strong consumer and business spending as well as a surge in exports ahead of retaliatory tariffs from China helped drive economic growth.

The US GDP growth rate in the second quarter of 2018 was the highest since the third quarter of 2014.

Out of ten sub-indices of ISM’s PMI, the most attention-drawing one is the sub-index of prices paid indicating future cost pressures in the US economy. The prices paid sub-index is also expected to ease, copying the headline PMI index with a reading of 70.0 after reaching a 7-year high of 79.5 in May.

Although ISM’s prices paid are only indicative of the overall inflation level in the US economy, the Federal Reserve might as well get the confirming sign of inflation coming “back to town” as early as this Thursday as core personal consumption expenditure (PCE) price index, Fed’s preferred gauge of inflation is expected to rise 2.0% over the year.

With core PCE price index rising 2.0% over the year, the US Federal Reserve Bank will officially admit that the inflation is back at the targetted level, a sign it has been waiting for in its official statements for years. 

This would, in turn, provide some reinforcement for markets that Fed is seriously on a path to raise interest rates two more times this year and several more next year.

The Fed has long targeted 2 percent inflation, but its favorite measure of inflation, the core personal consumption expenditures price index has stubbornly lagged, managing to hit that level just twice since April 2012. The last time it reached 2 percent was back in March last year.