UBS: SchISM
Just one week into 2016 and consensus forecasts for US growth are being challenged by a drop in the ISM manufacturing survey. But while manufacturing is weak, ISM non-manufacturing still looks robust, and this divergence suggests the problem is external weakness. Despite popular perception, manufacturing does not always lead non-manufacturing. But in any case, neither survey is weak enough to suggest recession.12.01.2016 | 09:23 Uhr
There is something about the beginning of the calendar year that makes people want to prognosticate about the future. This persists, despite the consistent failure of such prognostications in recent years. Once again, 2015 showed consensus forecasts for growth in the US (and China) to have been too optimistic at the start of the year. Just as in previous years, these were substantially revised down as the year progressed (see Functional Forecasts, 12 January 2015). Forecasts for US growth this year have started out more modestly, but are already being challenged by a drop in one of the most important leading indicators.
The ISM manufacturing PMI has a long and hallowed role as an early indicator of the health of the US economy. For a long time it has been one of the news releases that triggers the biggest market reaction, beaten only by the likes of the labor market report (which, ironically, is a lousy leadingindicator). Investors still watch it very closely.
Back in the 1960s and 1970s not only was manufacturing a larger part of the economy, it was before the advent of just-in-time processing. Inventories often ran too high during booms and then too low during recessions, so manufacturing swung around wildly with the economic cycle. This made manufacturing even more cyclical, and hence a far better leading indicator of the cycle.
Since then, the service sector has become much more important and it now represents almost 80% of the private sector economy. In 1997 the ISM non-manufacturing survey was created to capture the changing composition of the economy. At times the surveys have moved together, (chart 1) often with anufacturing leading by a month or more. For example, the ISM manufacturing led on the way down in 2000. But then sometimes the ISM nonmanufacturing has led, as in 2009, signalling the start of recovery. So at times they diverge, yet very rarely has that divergence been as large as it has been of late.