- The ISM surprised on the upside – rising to 52.7 in November from 50.8 in October – in yet another sign that the US is on track for 2½-3% growth in Q4. We look for a further rise in the ISM in coming months toward 55 before flattening out.
- The details were also strong with orders up for the second month in a row and the order-inventory balance improving further. The only soft spot is a small decline in employment but it should recover again soon.
- This should keep the Fed on hold for now, but the easing bias will be retained as slow to moderate growth should keep the unemployment rate far from the Fed’s implicit goal of about 6% and downside risks still prevail. Easing could be on the table in 2012. Details
The new orders index rose from 52.4 in October to 56.7 in November, showing a second rise in a row and moving above the long-term average of 55.3. The inventory index rose from 46.7 to 48.3. This suggests that inventories are still declining, but at a slower pace.
The order-inventory balance improved further in November, pointing to more
improvement in ISM. The export order index rose from 50.0 to 52.0, suggesting little impact from the euro crisis. The employment index fell to 51.8 from 53.5, but this should be no big surprise as it lags the new orders index by two to three months. The rise in orders is likely to be reflected in a higher employment index in the coming months.
The price paid index rose to 45.0 from 41.0. While rising it is still below 50 and hence showing that input prices are still falling, albeit not as much as in October. Price pressures have clearly eased as commodity prices have fallen and this is reflected in the prices paid index.
Outlook and assessment
The ISM index is well in line with other data, suggesting a further recovery to 2½-3% growth in Q4 from 2% in Q3 and below 1% in the first half of the year. We look for a further rise in the coming months to 55 before it flattens out. Inflation pressures are easing, underpinning the expectation that core inflation will peak soon and decline to 1½% by mid-2012. This will leave room for the Fed to add more stimuli should the unemployment rate fail to come down, or only decline gradually. For now the Fed is on hold but, in our view, there is about a 50/50 chance of more easing in 2012.