Fra SEB
ISM manufacturing fell to a new cyclical low in December
The ISM manufacturing survey fell back to a new post-2009 low in December,
declining from 48.1 to 47.2, the lowest since June 2009 (46.3). The December report
was almost uniformly bad with new declines in new orders, including export orders,
employment and, especially, a sharp drop in the production index. The ISM indicates a
further contraction in manufacturing output but is still consistent with growth in the
overall economy, albeit clearly below trend.
The ISM has now been lower than the Bloomberg consensus estimate for 6
consecutive months. One reason is probably the way the ISM has underperformed
other US manufacturing surveys. We believe that this reflects the fact that the ISM
covers larger and more export-dependent corporations, making it more sensitive to
both weak global conditions and the trade war with China.
As a comparison, the ISM covers somewhat above 300 corporations vs around 600 for the PMI. Our new ISM model, which is based on regional surveys and the PMI but also incorporates a variable to account for uncertainty regimes, correctly predicted a decline in December.
The weak outcome for November suggests that large US manufacturers remain under
pressure from the trade war despite some recent signs of stabilisation in global
industrial sentiment. The ISM tended to overstate growth in the economy during 2017
and beginning of 2018 and may similarly overstate the weakness in both
manufacturing and economy now.
In addition, we continue to see scope for some improvement in sentiment in coming months from the Phase One Deal, even if this deal will not remove any of the tariffs on industry. Still, current weak levels sends a warning signal over the state of the US economy and means that markets should continue to price in the possibility for further Fed cuts this year. While recent Fed communication has raised the bar for more easing our forecast for another cut in spring has gained further support.
