US: Manufacturing exiting the doldrums? – ING

James Smith, Economist at ING, suggests that against expectations for a dip, the US ISM Manufacturing unexpectedly increased in May, although the ISM indices are currently not key to the FOMC’s thinking.

Key Quotes

“The ISM Manufacturing index surprised on the upside, ticking up from 50.8 to 51.3, rather than down to 50.3 as had been expected following a raft of weak regional surveys. Looking beneath the surface though, the headline was lifted solely by a large pick-up in the supplier deliveries. Aside from that, most other components remained roughly where they were in April.

For the FOMC though, the ISM numbers are not essential in timing the next rate hike. Attention is now heavily centred on Friday’s labour report. In advance of this, some emphasis is likely to be put on the employment components of this, and to a greater extent the non-manufacturing ISM, although we’d note that neither are tightly correlated with non-farm payrolls. In any case, the employment component of the manufacturing ISM remained flat this time around.

As we noted in our recent payrolls preview, we think that the risk of an above consensus non-farm payrolls (NFP) reading (currently at 160k) is higher than a sub-consensus one. Although we tend to agree that job creation may be slowing as the economy reaches a point close to full employment, we feel that the month-on-month volatility in the headline NFP means that something at or above what we consider to be the underlying trend (around 185k) is reasonably likely (although, 35k workers were on strike last month according to the BLS, which will exert drag the figure slightly lower).

Nevertheless, we feel that this element of the labour report is not critical to the FOMC’s thinking at present. The Fed’s labour market “tick-box” has effectively already been ticked (and arguably has for several months) and the key now lies with the activity data, which has improved slightly after a weak first quarter. Thus, we feel that the answer to the June/July/September debate now lies with Chair Yellen (who speaks next week).”