United States: bad weather has a negative impact on the manufacturing index
Despite a softer ISM manufacturing survey, any loss of GDP growth momentum is likely to be modest and temporary. Our scenario for solid GDP growth overall in 2014 (3.0% y-o-y in Q4 2014) remains unchanged.
The ISM manufacturing survey published on Tuesday was surprisingly weak. The headline index fell sharply from 56.5 in December to 51.3 in January, well below consensus estimates (56.0), and its lowest reading since May 2013. The deterioration was quite broad-based, with the fall in the ‘new orders’ sub-component particularly striking, as it plunged from a high 64.4 to 51.2. This was the largest monthly fall since 1980.
There are at least three reasons why it is probably wise not to take too negative a view on this sharp deterioration. (1) Although it’s impossible to quantify its extent, the ‘polar vortex’ certainly had a negative impact on January’s survey – at least, that is what anecdotal comments cited in the ISM report were suggesting. (2) ISM manufacturing indices were particularly high in H2 2013, pointing to output growth stronger than suggested by hard data (see chart below). A downward correction was therefore to be expected. (3) Although most other manufacturing surveys (Markit PMI and regional surveys such as the Chicago PMI or the Philadelphia Fed) also corrected slightly downward last month, they remained much healthier overall.
As a consequence, we would not read too much into this deterioration over a single month. Nevertheless, following strong manufacturing output growth in Q4 and a sharp increase in inventories, some reduction in the pace of stockbuilding is likely in the near future. Temporarily, this may well slow the pace of the expansion in manufacturing activity in Q1, even after stripping out any negative impact from the severe winter weather.
Non-manufacturing ISM index bounced back in January
Today, it was the ISM non-manufacturing survey’s turn to be published. This time, the results surprised modestly on the upside. The composite non-manufacturing index bounced back from 53.0 in December to 54.0 in January, slightly above consensus expectations (53.7). However, at odds with its manufacturing counterpart, this index had declined significantly over the past few months (see chart above). A rebound was to be expected.
Taken together, the two ISM indices (manufacturing and non-manufacturing) point to less robust economic growth in January. Our model, which attempts to explain GDP growth based on the behaviour of both ISM indices, suggests that GDP growth settled at 2.1% last month, after 3.3% in Q3. However, quite often the model gives signals that differ from that given by GDP data. For example, in Q3 2013, GDP growth was 0.8 percentage point above what was suggested by the model…
Overall, the ISM surveys were downbeat. Following very strong growth in H2 2013, some growth moderation seems likely in Q1 2014, all the more so as inclement weather is temporarily weighing on economic activity. However, any loss of growth momentum is likely to be modest and temporary. Our scenario for solid GDP growth overall in 2014 (3.0% y-o-y in Q4 2014) remains unchanged.