Some Good News Amid the Noise

We view the Institute for Supply Management's monthly manufacturing and service sector surveys as very important inputs to our macro model. 

As we suggested in a post this morning, February's manufacturing survey suggests that the economy remains in decent (in fact, very decent) shape.

Bloomberg Economists, in their daily brief, report that while respondents shared "some concerns" over tariffs and suggested that "price pressures continue to build", the index overall paints quite the robust economic picture going forward.

That's good news amid all of the noise... (emphasis mine)

The manufacturing ISM eased slightly in March from February, but maintained levels consistent with robust activity in the factory sector. As a result, the quarterly performance is the strongest since mid-2004. GDP growth may be temporarily depressed in 1Q, but the ISM results signal that underlying economic activity continues to build momentum, laying the groundwork for a strong rebound in 2Q.

While there were some concerns regarding tariffs, survey participants in general reported solid business conditions, including tell-tale signs of an economy operating near its capacity, such as heightened delivery times and supply chain bottlenecks. Respondents described solid domestic demand, while also noting a tangible benefit from currency weakness. Price pressures continued to build.

The manufacturing ISM has had an impressive run in expansionary territory, but even more notable is the duration of its streak above an index reading of 55. Factory conditions are robust; and even though manufacturing employment comprises a relatively small share of the labor market, the strength in this sector should support firmer activity in tangentially related service industries, such as transportation, finance, engineering/design, etc.

The momentum in the ISM confirms that the "animal spirits" evident in many business surveys for the past several quarters are translating to an actual lift of economic activity. In turn, greater confidence in the business and economic outlook should make firms more willing to boost wages, add workers and invest in capital.

The manufacturing ISM headline cooled slightly more (59.3 in March vs. 60.8 prior) than the consensus of economists surveyed by Bloomberg (59.6). However, the quarterly performance was the strongest since mid-2004, and at current levels is more consistent with real GDP growth in the vicinity of 3% or greater. As such, the ISM is signaling a strong likelihood that GDP expansion accelerates in 2018 beyond the 2.6% year-on-year pace registered at the end of 2017.