US ISM Manufacturing Still in Contractionary Territory

on Jun 2, 2020
Updated: Dec 19, 2022

The first trading week of June started with the US ISM Manufacturing on a day where German and French banks were on holiday. The release showed the index still in contractionary territory, as the manufacturing industry suffers from the coronavirus pandemic. 

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The index bounced to 43.1 after 41.5 a month earlier but nonetheless remained below the 50 level that defines expansion vs. contraction territory. New orders, production, and employment components also rose, while supplier deliveries decreased.

While demand remains uncertain, it seems that May 2020 was a month of transition . Despite modest export orders uptick in May, imports reflect softer domestic demand.

Very Cautious Purchasing Managers in May

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The important thing to remember when interpreting the ISM is that the release is a survey. Manufacturing managers of various companies respond to questions related to new orders, employment, and other components of their business. Based on the answers, the data is compiled so that it shows contractionary or expansionary conditions, based on the 50 level – above shows expansion, below reflects contraction.

Besides the small bounce in the index, some managers expressed optimism. Quoting activity, for instance, improved, albeit not turning into orders yet—nevertheless, a positive sign.

Fuel sales demand is beginning to rebound again, confirming the slow return from lockdown measures. The overall impression is that despite what is going on with the coronavirus crisis, a lot of positive signs appear on the horizon. People look to projects for the fall of 2020 and beyond, and the optimism should pick up in the second half of the year.

Many investors look at the ISM releases for a different reason than the first one that comes to mind. Yes, the ISM data is a leading economic indicator, but some of its components deserve full attention for the investors.

For example, the ISM data typically comes out during the NFP week. Most of the time, both releases, ISM Manufacturing and Non-Manufacturing are out before the NFP Friday of that week, and sometimes only one of the two.

Traders focusing on the Fed’s mandate of job creation take the employment component of the ISM release and use it as an input for modeling a forecast for the upcoming NFP number. Hence, the employment component is key in offering an educated guess about the NFP release on Friday.

In this case, employment in the sector rose, a positive for the NFP on Friday.