US ISM highlights production anomaly - Wells Fargo

Analysts from Wells Fargo, explained that the headline ISM missed the mark in July with a slight moderation in the pace of expansion. “Interestingly, the production index rose to an 18-month high even as all other components were flat or down.”

Key Quotes:

“The ISM index fell to 52.6 in July from 53.2 in June. The production index edged slightly higher but all other components were either flat or slightly lower. The disappointing print for the ISM follows a mixed bag of regional manufacturing surveys in July. The Philly Fed survey fell to -2.9 from expansion in June. The Kansas City Fed fell 8.0 points and the NY Fed’s Empire Index fell 5.5 points from +0.6 previously. Admittedly, there were positive survey data as well. The Richmond Fed survey climbed 20 points and the Dallas Fed survey, although still negative, strengthened for the second month.”

“The employment index fell below the breakeven mark, signaling more layoffs could be in store for the factory sector. Manufacturers have cut jobs in three out of the past five months with a net loss of 42,000 factory jobs.”

“Production is a coincident indicator for the economy. On that basis, it is counter-intuitive to see manufacturing businesses ramping up production while at the same time making cuts to payrolls and drawing down inventories (even at a slower rate).”

“Perhaps the inventory drawdown has left stockrooms too spare resulting in production increases as orders pick up. In our view, these crosscurrents are explained somewhat by the fact that we are late in the economic cycle and businesses are understandably cautious with all the various risk factors.”