Continued momentum in US: ISM manufacturing report - Nomura

Analysts at Nomura gave a review of the ISM manufacturing report, explaining that exports orders indicate a further rise in US exports.

Key Quotes:

"The Institute for Supply Management (ISM) indicated continued momentum in the manufacturing sector in March, with 17 industries out of 18 reporting growth. The headline index registered an elevated reading of 57.2, in line with market expectations (Nomura: 56.5, Consensus: 57.2), although lower than 57.7 in February by 0.5 percentage point (pp). Production index declined to 57.6 from 62.9. New orders indexes slipped slightly to 64.5 from 65.1. Despite some cooling, these indicators still remained elevated, well above the breakeven point of 50. These readings suggest that upbeat momentum sustained in March.

Moreover, the decline in inventories at factories, coupled with an increase in suppliers’ delivery time, indicates increased demand in the sector and suggests that this momentum may sustain in coming months. Further, backlog of orders index, which registered 57.5, the strongest reading in in three years, also implies that healthy demand may continue in the near term. The new export orders indexed improved to 59.0, which is the highest reading since November 2013, while imports index remained elevated at 53.5. Strong growth in new exports orders suggests improving global demand and appears consistent with upbeat readings in global PMI. For example, the China manufacturing PMI showed steady improvement in March, and the Markit Eurozone manufacturing PMI also showed backto-back increases in recent months.

The ISM report today further highlights the puzzling divergence between surveys and spending data. Despite highly elevated readings from consumer and business surveys in March, non-survey data for Q1 did not show material acceleration. As a result, our Q1 real GDP tracking estimate now stands at 0.8%. One possible cause of the divergence is inflation adjustment. As the index for prices jumped to 70.5 in March, marking the highest reading since May 2011, nominal sales and profits could have risen strongly. While ISM survey respondents are instructed to report based on an inflation-adjusted basis, higher prices might have fed into ISM numbers.

Another possible culprit is a psychological factor. Since stock prices have trended higher and financial conditions for businesses in general improved recently, the ISM numbers could have overstated the actual improvement. As for labor market conditions, the ISM employment index climbed to 58.9, the strongest since June 2011, up 4.7pp from 54.2 in February. This suggests strengthening labor market conditions, consistent with healthy gains in manufacturing payrolls seen in January and February. However, the shortage of skilled workers appears to remain as an industry challenge.

The transportation equipment sector reported that, “Job market has been very good in the region, and finding talent has been challenging." In the March employment report by the BLS, scheduled for release on 7 April, we expect a trend-like gain in nonfarm payrolls. The upbeat ISM report for March appears to support our view that the pace of job creation likely remained steady. Optimistic readings from regional manufacturing surveys such as the Empire State and Philly Fed surveys are also consistent with our view. However, in January and February, employment increased strongly partially boosted by unusually warm weather. As such, we expect some downside risk as the transitory boost from weather-related factors dissipates."