Last week, a new monthly report from the Institute for Supply Management (ISM) led some market watchers to speculate that the global recovery could be strengthening once again.
For June, the Institute’s Purchasing Manager Index, or PMI, the main monthly gauge of U.S. manufacturing activity, came in at 55.3%. The latest figure surprised economists, who had expected a reading of 52%, and it also came in higher than last month’s 53.5% (any figure above 50% indicates an expanding manufacturing sector).
To us, the better-than-expected PMI does confirm that the U.S. is not entering a double dip recession. It also suggests that some of the extreme weakness in May was related to one-off events such as floods in the Midwest and the disruption of the global supply chain due to Japan’s earthquake.
Still, the report doesn’t mean the recovery is back on track. As some market watchers noted, gains in inventories, among gains in other components, helped boost the index this month. The new order component of the survey, however, rose to just 51.6% in June from 51% in May. May’s new manufacturing order reading was a huge drop from April’s 61.7% figure. The new order component of the survey is a useful leading indicator of Gross Domestic Product (GDP) and other components of the ISM index, such as inventories, tend to lag it.
If the new order drop from April to May, which was the sharpest drop since 2001, had just been a function of disruptions in the global supply chain caused by the Japanese earthquake, the drop should have partially reversed this much. As it didn’t reverse much, the latest ISM report to us still suggests U.S. GDP growth of around 2.5% and not the 3% to 4% the market had been expecting last spring. The bottom line of the new figures: the recovery is intact, but it’s still likely to be slow over the next one to two quarters.
As a result, we still are expecting modestly slower growth and better relative performance for defensive sectors such as healthcare and telecommunications.
