James Smith, Economist at ING, suggests that after Friday's disappointing payrolls data, the latest ISM Non-manufacturing survey provides the FOMC with another reason to leave policy unchanged in June.
“After May’s non-farm payrolls plummeted, the ISM Non-manufacturing came crashing back down to 52.9 from 55.7, much lower than expected. Aside from supplier deliveries, the other main components that contribute to the headline recorded fairly sizable falls (employment and business activity), particularly new orders, where the size of the month-on-month drop was the largest since November 2008. This is especially concerning, given that in theory it sets the precedent for (or “leads”) future business activity.
Although the ISM surveys are perhaps not the most central part of the FOMC’s reaction function, the magnitude of the fall means that it will probably feature in the debate over near-term policy. Indeed, given that the US recession story has faded away over recent weeks, it is possible that the combination of today’s weak non-farm payrolls figure and the drop in the ISM Non-manufacturing prompts the debate to resurface to some degree over coming weeks.
Either way, it is another reason for the FOMC to leave rates unchanged in June, with focus now on Chair Yellen’s speech on Monday to see how the latest data will affect policy in coming months.”
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