ISM manufacturing index (May): Downward correction
Written on June 29, 2011 by Wiley Hayden
The Chicago PMI fell 3 points in April, but remained elevated at 67.6. However, all important subcomponents except for supplier deliveries declined significantly, and the substantial slowdown in delivery time – generally a positive sign – could this time have been connected to disruptions in the supply chain caused by the Japanese disaster. Given that the regional manufacturing indices for May have been weaker for the most part, we expect the Chicago PMI to have fallen markedly to about 60.0. However, as the expansion threshold is 50, this would still be a fairly high level.
As the graph shows, the pace of growth in private nonfarm payrolls has been accelerating continuously for some time, and the 3-month moving average reached 253k in April. In the past, such changes have been accompanied by much higher levels of consumer confidence than the current ones. As gasoline prices have stopped rising and the University of Michigan’s consumer sentiment has recovered somewhat, we expect the Conference Board’s consumer confidence to have gone up again in May, from 65.4 to 67.5, as it generally reacts quite sensitively to labour market developments.
After three sharp declines in a row to the lowest level in more than a decade, construction spending rose by 1.4% mom in March, partly due to better weather conditions. We expect the moderate rebound to have continued in April with an increase of 0.5% mom, even though housing starts had fallen by more than 10% mom.
After four monthly readings above the 60 mark, the ISM manufacturing index could have fallen to about 57.0 in May. So far the signals from the regional manufacturing indices have been mixed but predominantly weaker: the New York Empire fell to its lowest level this year, but its weighted subcomponents improved somewhat. The Philadelphia Fed index has continued to tumble, dropping by almost 40 points within 2 months to a modest expansion level only. The Chicago Fed activity index and the Richmond Fed index even turned negative.
The ISM non-manufacturing index decreased by 4.5 points to 52.8 in April, thus widening the gap to its manufacturing counterpart noticeably. Manufacturing is moderating but still leading the economic upswing. However, we assume that last month’s deterioration in the non-manufacturing index was exaggerated, and thus forecast that the ISM non-manufacturing index will have gone up to about 54.0 in May.
Domestic vehicle sales increased by 2.6% to 10.22m in April, but given the drop in car orders and disruptions in the supply chain, we expect them to have gone down to about 9.6m in May.
In the second estimate, the GDP growth rate for Q1 was confirmed at 1.8%, but nonfarm business gross value added was revised up slightly from 3.1% to 3.2% qoq annualised. It cannot be ruled out that aggregate hours worked will also have been somewhat higher than initially estimated, and we thus expect nonfarm productivity to have gone up by 1.6% qoq. Unit labour costs could have risen by 1.0% qoq annualised, just as announced in the first estimate.
Initial jobless claims rose unexpectedly by 10k to 424k in the week ending 21 May, possibly reflecting the negative impact of severe weather conditions in some regions. Jobless claims are currently rather elevated due to a couple of temporary factors, but we expect them to have declined to 410k in the week ending 28 May.
Factory orders could have fallen by about 1% mom in April. Non-durable goods orders might have continued to increase noticeably, particularly due to higher energy prices, but we already know that durable goods orders plunged by 3.6%.
Growth in non-farm payrolls accelerated to 244k in April, and private payrolls actually rose by 268k. The labour market situation appears to have improved significantly, but the fact that the unemployment rate increased to 9.0% shows that conditions are still far from satisfactory. Given the reports about production shutdowns in the automobile industry, we forecast that May’s increase in nonfarm payrolls will have slowed to about 200k. The unemployment rate could have returned to 8.9%, however. If average hourly earnings went up by 0.2% mom, the annual rate would remain below 2% for the 18th consecutive month.
ADP private payrolls growth is likely to have slowed slightly to about 170k in May, as jobless claims, which are factored in, rose to more than 430k in the relevant first week of the month.
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