US: ISM non-manufacturing survey consistent with stronger growth - MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that the US ISM non-manufacturing survey provided a further reassuring signal that weakness evident in August was driven by temporary factors.

Key Quotes

“Business confidence rebounded much more strongly than expected by 5.7 point to 57.1 in September. When combined with a similar rebound in the ISM manufacturing survey it results in the economy-weighted composite measure rising to 56.4 according to our calculations which is consistent with the annual rate of growth accelerating to over 2.0%. It supports the Fed’s view that the economy is likely to record stronger growth in the second half of this year after expanding weakly by an annualized rate of 1.1% in the first half of the year.

The Fed remains on course to resume rate hikes by the end of year unless there is a negative shock/surprise to their economic outlook offering support for the US dollar in the near-term. However, we don’t want to overstate the underlying strength of the US economy which is likely exaggerated by the ISM non-manufacturing survey reading for September. The survey has been very volatile this year although the underlying trend has weakened. The average reading so far this year has been 54.5 compared to 57.2 in 2015. Nevertheless it is a relief that a sharper slowdown does not appear to be underway. The positive impact on the US dollar from the stronger survey has likely been dampened by the proximity of the non-farm payrolls report on Friday, and political uncertainty ahead of the US Presidential election in November.

The ADP survey released yesterday signalled that private employment growth may have slowed further in September although at 154k jobs gains/month still remains solid enough to tighten labour market conditions further. If the ADP survey proves to be an accurate leading indicator of the NFP report on Friday, it should be sufficient for the Fed to justify resuming rate hikes by year end. The ISM non-manufacturing survey also sent another encouraging signal over the health of the labour market. The employment sub-component increased sharply by 6.5 points to 57.2 signalling that employment growth is likely to strengthen in the coming month back above 200k jobs gains/month. It will likely be too early to see a pick-up in this week’s NFP report.”