ISM To Give An Early Read On Fallout From Market Volatility

by: Russ Koesterich, CFA

Of all the economic numbers coming out this week, Thursday’s report on August U.S. manufacturing activity from the Institute for Supply Management (ISM) is the most important, in my opinion.

I’m watching this report closely for three reasons. First, it’s a good leading indicator of economic activity in general. The report’s new order component, in particular, tends to be highly correlated with the next quarter’s GDP and is the most relevant number for predicting future economic growth.

Second, the report is not subject to revisions, meaning what you see in the initial report is what you get. Finally, the report is extremely timely. It’s one of the first snapshots we’ll get on how the economy reacted to market volatility in August.

Thursday’s report will consist of the Institute’s main monthly gauge of U.S. manufacturing activity, called the Purchasing Manager Index (PMI), as well as a host of other manufacturing activity measurements for August such as indices of new orders, production and employment.

What do I expect the report will show? Economists are currently expecting the PMI for August to come in at 48.5, below both July and June’s readings. While I don’t want to forecast exact numbers, I expect the data to confirm that the slow growth environment is likely to continue and an August PMI figure around 50 would serve as such a confirmation. The August numbers will also likely reflect a further loss in business confidence.

After recent weak regional manufacturing data, investors will also be paying close attention to the ISM report. A better-than-consensus number, even one below 50, will likely provide some relief for markets.

Source: Bloomberg

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