USA: ISM indices still pointing to healthy growth overall in January

We remain quite optimistic on the US economy. We expect that GDP growth will reach a strong 3.8% in Q1 2015, and our yearly forecast remains unchanged at 3.4%.

The ISM manufacturing index dropped further m-o-m in January, whilst its non-manufacturing counterpart bounced back slightly. Together they continue to point to healthy economic growth. We remain quite optimistic on the US economy.

The ISM manufacturing index fell further in January

The ISM manufacturing survey for January 2015 was published on Monday. The headline reading dropped further from 55.1 in December to 53.5 in January, below consensus expectations (54.5). The index has fallen markedly since October last year (see chart above), although the levels registered last autumn were particularly high. October’s number was the highest since February 2011.

The deterioration last month was quite widespread. The most important sub-indices (new orders, output and employment) fell significantly. The ’new orders’ index declined form 57.8 in December to 52.9 in January. And without much surprise, in a context of a rapidly rising dollar, the sub-index for ‘new export orders’ also fell further, dipping below the 50 points mark (49.5).

The fall-back in the ISM manufacturing index must be put into its proper context. First, at 53.5 it still remains a relatively healthy reading. Second, it seems that the West Coast port docks slowdown (dockers disputes) over the past few months has caused some big supply disruptions, which may well have contributed to the recent decline in the index. Third, once again swings in the ISM index have been at odds with what is suggested by hard data (see chart below). The ISM ‘output’ index surged last summer before falling back more recently, whereas industrial output growth slowed last summer before bouncing back over the past few months.

In any case, although we believe the combined effect of lower oil prices and a higher dollar will be a modest plus for the economy on average this year, it should have a clear negative impact on the manufacturing sector, which is much more dependent on exports and the oil extraction sector than the whole services-oriented economy.

Non-manufacturing ISM bounced back slightly

The ISM non-manufacturing survey was published today. Unlike its manufacturing counterpart, the composite non-manufacturing index bounced back slightly, edging up from 56.5 in December to 56.7 in January, slightly above consensus expectations (56.4). Although it settled at lower levels than on average in Q4, the headline index remained pitched at historically relatively high levels (see chart on first page).

Both the ‘new order’ and the ‘business activity’ sub-indices rebounded m-o-m. However, the ‘employment’ index eased further from 55.7 in December to 51.6 in January.

Together, the two ISM indices suggest that overall economic growth has remained robust so far in Q1. If we use historical correspondence to try to calibrate what the ISM indices are pointing at in terms of GDP growth (see chart below), we arrive at 3.3% in January, following 3.8% on average in Q4 2014 and 4.1% in Q3.

January’s ISM surveys therefore suggest that the economy continued to expend healthily last month, although at a less buoyant pace than in H2 2014. Nevertheless, although they are timely and useful indicators of the strength in the economy, ISM surveys are not very reliable at forecasting GDP growth in the short run. Actually, as we have seen above, ISM indices were pointing to 3.8% GDP growth in Q4 2014, whereas the first estimate published last week was at 2.6%.

In any case, we remain quite optimistic overall on the US economy. Although economic data were a bit disappointing recently, we expect that GDP growth will reach a strong 3.8% in Q1 2015, and our yearly forecast – which was revised up last week – remains unchanged at 3.4%.

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