Free | Global Macro & Strategy

Macro in a minute: ISM still strong, prices ripping higher

The latest ISM Manufacturing Purchasing Managers Index (PMI) has been released for the US. As regular readers would know, we like to look at this and compare it to a forward looking model that tries to predict the likely direction of this important metric over the coming year or so. As many market participants use the ISM as a real time proxy for the US business cycle, which in turn is a big driver of global growth, it’s one of the more important metrics to keep tabs on each month. The ISM also correlates with returns from US shares (which in turn correlates highly with Aussie shares).

Generally just known as ‘the ISM’, it is a diffusion index, where anything over 50 indicates expansion, while under 50 indicates contraction. However, its also important to note the direction it is travelling – is it accelerating or decelerating.

The latest figures show the following:

  • The headline PMI decelerated to a still very strong 58.7, down from 60.5 the previous month
  • The New Orders component also decelerated to a still very strong 61.1, down from 67.5 the previous month
  • The Employment component accelerated to an expansionary 52.6, up from 51.7 the previous month
  • Prices spiked higher again to 82.1, up strongly AGAIN from the 77.6 of the previous month.

In the chart above, the blue line is a multi-factor model of ours that provides a gauge of prior stimulus or tightening in the pipeline of the financial system, that acts on a lag to the real economy. As you can see, it has historically provided an excellent look forward to the likely future direction of the ISM and US business cycle.

The effect of COVID was that it brought forward and magnified the trough that was happening anyway in early 2020 via the lockdowns and business closures, and has then magnified the expected bounce back via the business re-opening process and the more immediate liquidity and fiscal stimulus measures. Direct fiscal measures are not included in the model, so you can clearly see how much these more immediate stimulus measures have juiced the normal cycle.

The bottom line

Whilst there was some sequential deceleration from the previous very strong month, it is not yet anything of real consequence, as the readings themselves were still quite strong. The further acceleration of prices is probably the biggest takeaway, as this correlates highly with inflation (more on that in further articles). Looking forward, previous financial stimulus in the pipeline (the blue line) is still to the upside, however the current fiscal stimulus induced overshoot could easily mean a moderation in this data (the orange line converging down to the blue line) as we move forward over the next several months – with a hook down in Q3 in particular on the radar.  There is then a huge upward impulse in late 2021/ early 2022.