US ISM: August can be a head-fake - Wells Fargo

According to analysts from Wells Fargo, the 58.8 reading for ISM signals the fastest pace of manufacturing growth in six years and shows that the factory sector is “undoubtedly on an upswing, but August can be a head-fake”. 

Key Quotes: 

“After the dud employment report earlier this morning, the latest print for the ISM manufacturing index offers a little more excitement. Manufacturing activity in August rose to its highest level (58.8) since 2011, according to the Institute for Supply Management.”

“Admittedly, manufacturing jobs have gone 10 months without a decline and the 36,000 increase reported in August was the biggest monthly increase in four years. So, maybe this ISM report is not such a red herring after all.”

“Before we get too far ahead of ourselves celebrating the great manufacturing renaissance, it bears noting that the August print for ISM last year was an aberration and this may be as well. August has proven to be a difficult month for seasonal adjustment at the Labor Department and perhaps the ISM has had similar issues. Last year in August the ISM suddenly and unexpectedly fell below 50, signaling contraction, but a month later the ISM jumped to 51.7 and has not returned to contraction territory since.”

“There are some clues in today’s ISM about the current state of inventory dynamics. In fact the two largest overall moves in the month were in the inventories component, which jumped 5.5 points, signaling the fastest pace of stockpiling in seven years and customer inventories, which dropped 8.0 points to 41.0 which suggests customer inventories are too low—the lowest in fact that we’ve seen in six years.”

“The takeaway in our view is that there is a bulge getting ready to work its way through the supply chain and as that plays out we expect inventories to be additive to topline GDP growth in the second half of 2017. Of course, Hurricane Harvey will introduce an additional degree of variability which we will be monitoring.”