US ISM Manufacturing Index Unexpectedly Rose in August; Construction Spending Strengthened in July

● The Institute for Supply Management (ISM) manufacturing index unexpectedly inched higher in August 2013, climbing to 55.7 from 55.4 in July. The reading in August marked the highest index level since June 2011. Market expectations had been for a 54.0 reading.

● The increase reflected a solid jump in the new orders component to 63.2 and to its highest level since April 2011. The production index moderated to a still-solid 62.4 from 65.0 while the employment index dipped to 53.3 from 54.4 in July.

● The increase in August left the average level of the ISM manufacturing index in the first two months of the third quarter of 2013 combined at 55.5, which was well above the averages of 50.2 and 52.9 in the second and first quarters of 2013, respectively. Sizeable fiscal consolidation, in the form of higher taxes in January and sequestration cuts to government spending beginning in March, likely weighed on business confidence in the first half of 2013. Further fiscal uncertainty surrounding debates over the 2014 federal budget and the need to raise the debt ceiling has the potential to shake confidence again later this year; however, an apparent easing in business concerns in the third quarter of 2013, along with reasonably solid job growth, suggests that underlying growth in the economy is continuing to improve.

● In a separate report, construction spending rose 0.6% in July 2013 following an upwardly revised flat reading (previously was -0.6%) in June.

The ISM manufacturing index unexpectedly inched up to 55.7 in August, which was up from 55.4 in July and well above the 50.9 and 49.0 readings in June and May, respectively. The headline reading in August was the strongest since June 2011 and was above market expectations for a dip to a 54.0 level in the month.

The modest improvement in the headline index largely reflected a sizeable improvement in the new orders component, which rose to 63.2 (its highest level since April 2011) from 58.3 in July. The gain was partly offset by a drop in the production index to a still-solid 62.4 from 65.0 in July and moderation in the employment index to 53.3 from 54.4. The employment index reading in August was still above the 48.7 and 50.1 readings in June and May, respectively. Modest movements were recorded in the supplier deliveries (up to 52.3 in August from 52.1 in July) and inventories (up to 47.5 from 47.0.)

The increase in August left the average level of the ISM manufacturing index in the first two months of the third quarter of 2013 combined at 55.5, which was well above the averages of 50.2 and 52.9 in second and first quarter of 2013, respectively. Sizeable fiscal consolidation, in the form of higher taxes in January and sequestration cuts to government spending beginning in March, likely weighed on business confidence in the first half of 2013. Further fiscal uncertainty surrounding debates over the 2014 federal budget and the need to raise the debt ceiling later this year has the potential to shake confidence again later this year; however, an apparent easing in business concerns in the third quarter of 2013, along with reasonably solid job growth, suggests that underlying growth in the economy is continuing to improve. We expect that overall third-quarter 2013 GDP growth might not improve on a stronger than expected 2.5% increase in the second quarter of 2013, with our near-term monitoring pointing to a smaller increase of around 2.2% in the third quarter; however, with an expected pickup in the fourth quarter, we still expect average growth in the second half of the year will improve on the average 1.8% increase in the first half of the year as a whole.

In a separate release, construction spending in the US climbed by 0.6% in July 2013, which was above market expectations for a 0.3% increase and marked an improvement from the upwardly revised flat reading (previously reported as -0.6%) in June. The headline increase in July reflected a stronger 0.9% increase in private-sector spending that offset a modest 0.3% dip in the public sector. The gain was relatively evenly split between residential (0.5%) and non-residential (0.6%) spending. The strengthening in spending in July bode well for overall investment in structures to continue to improve in the third quarter of 2013 while upward revisions suggest that construction spending in the second quarter was slightly stronger than originally thought.

 

RBC

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