US Economy: Reflections on the July ISM PMIs

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My estimate of the July GDP-weighted PMI (manufacturing and non-manufacturing) of 52.5/53 fell short of the actual 54.58 as the ISM non-manufacturing PMI surprised on the upside.

The latest GDP-weighted PMI is suggesting that US GDP growth in the third quarter could be running at approximately 3% on a year-ago basis compared to my previous estimate of 2% to 2.5%. Coming off a high base, the 3% year on year effectively entails that on a quarter-on-quarter annualised basis GDP growth in the third quarter has slowed to approximately 1% from 2.4% in the second quarter. Yep, the double dip pundits will have a field day despite a steady growing economy!

Sources: FRED; ISM; Plexus Asset Management.

The most surprising numbers from the ISM PMIs are employment. Employment in the manufacturing sector continues to be robust and is improving at a faster rate. After experiencing a minor dip into contraction territory employment in the non-manufacturing sector gained traction with the PMI increasing to 50.9 in July from 49.7 in June.

Sources: ISM.

My GDP-weighted PMI suggests that the rollover of the unemployment rate in the US is set to continue. My target for the unemployment rate is 9% by the end of the current quarter, down from 9.5% in June.

Sources: FRED; ISM; Plexus Asset Management.

The GDP-weighted PMI also indicates that job creation in the non-farm sector is currently in the vicinity of between 75 000 and 100 000 jobs per month.

Sources: FRED; ISM; Plexus Asset Management.

Another feature of July’s ISM PMIs is that price pressures in the economy have eased considerably but the impact on the US CPI inflation rate will be very limited.

Source: ISM.

The change in the oil price compared to the same time a year ago indicates that the inflation rate has bottomed in June and July and is likely to head to 2% by the end of the current quarter.

Sources: FRED; I-Net; Plexus Asset Management.

The recently published PMI data are likely to be supportive of equity prices in the short-term. Longer-term, however, price movements will evolve depending on the health of the economy. Caveat emptor!

Sources: ISM; I-Net; Plexus Asset Management.

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