Sunday 17 December 2017

Daily Market Update: US manufacturing remains under pressure but strong vehicle sales highlight strength in domestic spending

Manufacturing in the US on the rise
Manufacturing in the US on the rise

Simon Barry

Yesterday’s news from the US provided a good snapshot of some of the key themes facing the US economy at present.

The ISM survey of manufacturing revealed a further slippage in factory sector activity in September. The headline activity index fell for the third month in a row and slipped by more than expected in declining to 50.2 last month from August’s 51.1, with the message of weakness at the headline level reinforced by softer readings within other components, including new orders and production. This leaves the index at its lowest level since May 3013 and barely above the 50 breakeven level. The sector has been facing a double headwind from softer global growth and a stronger US dollar, highlighted by a fourth consecutive decline in the new export orders series within the survey.

While the ISM manufacturing survey has a well-earned and long-standing reputation as an important indicator of the US business cycle, it is important not to overplay its representativeness of the broader US economy. In particular, the share of manufacturing in the overall economy in the US has been trending lower for decades, with employment in the sector accounting for less than 9% of overall non-farm employment for example (a share that has halved in the past 30 years). The significance of this is that much larger, domestic-facing elements of the US economy are clearly doing considerably better than manufacturing at present (service providing sectors account for over 86% of all employment).

A striking example of this came via the latest set of vehicle sales figures released overnight. September sales were again stronger than expected in reaching a 10-year high of 18.1million units (in annualised terms) – a particularly impressive result given the upheaval in US stock markets from mid-August. This leaves sales in Q3 up some 3.9% (or over 15% in the annualised terms favoured by US analysts and statistical agencies) - an indication that domestic spending remains robust even if the factor sector has come under pressure. So while we devoted a chunk of yesterday’s commentary to outlining why additional stimulus looks likely in the euro zone, our reading of the totality of the incoming news on the US economy continues to support our view that the Fed will soon need to begin the process of stimulus withdrawal in the US.

The UK manufacturing PMI was actually a touch better
The UK manufacturing PMI was actually a touch better

Elsewhere, the UK manufacturing PMI was actually a touch better than expected, though it still edged lower in September. Similar to the US, UK manufacturing has suffered from a loss of momentum this year, but in contrast the larger and more important services sector has continued to perform relatively strongly, though perhaps not quite as strongly as earlier in the year. We will get an important update on service sector momentum with the release of the services PMI on Monday.

Looking to the day ahead, the US payrolls report is released today. Expectations are for a 201k gain in September after 173k (a figure which may see an upward revision) in August. At the Fed’s September gathering they cited that further evidence is needed “including some further improvement in the labour market, to bolster its confidence that inflation will rise to 2 percent in the medium term” before any decision to increase rates will be made. In the eyes of most analysts, a headline that lands around consensus would represent an economy that remains on track in its progress towards conditions where a rate hike may be deemed suitable by the Fed, potentially supporting dollar strength. Alongside this announcement, another key release to watch today will be average hourly earnings for September, which are expected to advance by 0.2% m/m after 0.3% in August. This would translate to an acceleration from 2.2% in August to 2.4% y/y (a level of growth not seen in 6 years), consistent with a labour market that continues to strengthen. Expectations are for the unemployment rate to remain unchanged at 5.1% in September. Additionally, factory orders (ex-transport) are published for August after a -0.6% m/m figure in July.

Lastly, Stanley Fischer—a hugely influential member of the Federal Reserve—gives a talk on monetary policy today.

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