June 5, 2017 Reading Time: 2 minutes

Two reports from Institute for Supply Management both point to similar conclusions. The “Manufacturing Report on Business” and the “Non-Manufacturing Report on Business” both suggest economic activity continues to grow at a moderate pace, employment is rising further, and price pressures have diminished.

The ISM’s Manufacturing Purchasing Managers’ Index – a survey of purchasing managers’ views of business conditions – rose 0.1 to 54.9, where 50 is neutral, above 50 suggests expansion, and below 50 indicates contraction. The non-manufacturing index fell 0.6 points to 56.9 but remains well into expansion territory.

Among the key components, production fell in both reports but is still solidly above neutral. The manufacturing-production index fell 1.5 points to 57.1, while the non-manufacturing-activity index fell 1.7 points to 60.7. In contrast, employment indexes rose in both reports, with manufacturing up 1.5 points to 53.5 while non-manufacturing surged 6.4 points to 57.8. The strong results of the ISM employment indexes combined with several strong employment estimates from the ADP Research Institute, and the record-low level of initial claims as a percentage of employment could indicate that the recent slowdown in jobs growth reported by the Bureau of Labor Statistics might be revised higher at some point in the future.

The forward-looking component of the reports, the new-orders index, rose for the manufacturing sector but fell for non-manufacturing. The manufacturing new-orders index rose 2.0 points to 59.5, while the non-manufacturing new-orders index fell 5.5 points to 57.7. For both new-orders indexes, the subcomponent for new export orders fell in May, dragging down the overall new-orders index. New export orders in manufacturing fell 2.0 points to 57.5, while the index on non-manufacturing new-exports orders plunged 11.0 points to 54.5.

The final message from the two May reports from the ISM is that price pressures have receded. The manufacturing price index fell 8.0 points to 60.8, while the non-manufacturing price index fell 8.4 points to 49.2. The message is consistent with the softening of core consumer prices in the CPI.

The key take-aways are that economic activity continues to expand for both manufacturing and non-manufacturing; employment is rising, which should help support future consumer spending; new orders are rising, led by higher new domestic orders; and price pressures eased a bit. That should be generally good news for Fed policy makers as the June 13–14 meeting approaches, though easing prices may give policy makers some concern. Still, it’s widely expected that the Fed will raise rates by 25 basis points at the June meeting and is likely to follow through with a third hike in 2017, though the timing of the third hike is uncertain.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.

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