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02 03 2016 | by Victor Xing | Economics

January ISM recap: weakness continues

ISM Manufacturing

The latest ISM Manufacturing PMI came in slightly below consensus at 48.2 vs. 48.3 expectations (readings below 50 indicate contraction) as dollar strength continues to weigh on U.S. exports.  Additionally, softness in oil prices also constrained domestic activities – both in the manufacturing sector and its periphery service sector.

  • Headline ISM Manufacturing PMI at 48.2 vs. 48.0 prior (48.3 market consensus)
  • New Export Orders at 47.0 vs. 51.0 prior
  • Employment at 45.9 vs. 48.0 prior
  • Prices at 33.5, unchanged vs. prior
  • Backlog of Orders at 43.0 vs. 41.0 prior

Federal Reserve’s trade weighted broad dollar index rose further in January

ISM manufacturing vs. trade weighted (broad) dollar index
ISM manufacturing vs. trade weighted (broad) dollar index

ISM Non-manufacturing

Weakness in the manufacturing sector is largely expected, but latest readings from the service sector has proven to be more troubling.  Headline non-manufacturing PMI came in at 53.5 vs. 55.5 expectations – a relatively large miss.  The highly watched employment sub-index printed 52.1 vs. 56.3 prior.  This supports the argument that weakness in the energy sector (and echo findings by Federal Reserve Bank of Dallas) is weighing down growth in other non-energy areas.

  • Headline ISM Non-manufacturing NMI at 53.5 vs. 55.8 prior (55.5 consensus)
  • Business activities index at 53.9 vs. 59.5 prior
  • New Orders at 56.5 vs. 58.9 prior
  • Prices at 46.4 vs. 51.0 prior
  • Employment at 52.1 vs. 56.3 prior

Prices of crude oil (WTI) used to illustrate the impact on non-manufacturing activities

ISM non-manufacturing vs. WTI crude futures
ISM non-manufacturing vs. WTI crude futures

The weakness in ISM non-manufacturing’s employment index is worth monitoring.  Given service sector’s out-sized weigh in the U.S. economy, service employment is more correlated with the monthly Payrolls report, which is a strong driver on FED policy.

Next article02 02 2016 | by Victor Xing | Central Banks

FOMC’s maximum employment mandate and equity valuation