US: Continued expansion in manufacturing output - RBS

Research Team at RBS, notes that the US manufacturing ISM index slipped to 52.6 in July (consensus 53.0, RBS 52.0) from 53.2 in June, signalling continued expansion in manufacturing output.

Key Quotes

“Most of the growth related details stayed solid at the start of the third quarter: The new orders index (the most leading component) was nearly steady at 56.9 (after hitting an eighteen month high 57.0 in June); and the production component rose from 54.7 in June to 55.4 in July (highest since early 2015). However, the employment index fell to a point to 49.4, reversing the improvement that put the index back above the 50 mark in June. Inventories rose a tick to 49.5 after 48.5, while the supplier deliveries index fell to 51.8 from 55.4.

Meanwhile, the separately reported export orders index edged to 52.5 in July from 53.5 in July; it was as low as 46.5 in February. The net improvement since the low coincided with the pickup in US exports.

Overall, the level of the manufacturing ISM remains consistent with a moderate pace of expansion in the factory sector. Perhaps some of the rise recently in the factory sector may be reflecting a solid start to the summer for auto makers, as production schedules look to be firming in Q3. In addition, the sharp inventory drawdown in Q2 reported in Friday’s Q2 GDP report should allow a faster pace of overall production in Q3.

According to the ISM, “if the PMI® for July (52.6 percent) is annualized, it corresponds to a 3 percent increase in real GDP annually”. Comments from respondents stayed mostly positive in July, although some expressed caution. For example one respondent said "Seems to be a bit more optimism in the markets. But, U.S. Presidential race might dampen the mood." Of course, lots of uncertainties still exist, i.e., Brexit fallout and whether domestic demand for durable goods holds up despite global slowing and continued uncertainties about the outlook.”