– The Institute for Supply Management (ISM) manufacturing index declined to 50.7 in April 2013 from 51.3 in the previous month; market expectations had been for a decrease to 50.6.
– While the further moderation in the ISM manufacturing index in April was disappointing, the details of the report (outside of employment) provided scope for some optimism. In particular, the combination of a contraction in inventories with a pick up in new orders resulted in a sharp increase in the spread between these two components, which is indicative of a pick up in production activity in the coming months. The disappointing read on manufacturing employment growth (or lack thereof), however, followed the weaker than expected ADP National Employment Report released earlier this morning and is likely to temper expectations for a significant improvement in Friday’s April non-farm payroll report from the 88,000 increase recorded in March.
– In a separate report, construction spending declined by 1.7% in March 2013, thereby missing expectations for a 0.6% increase in the month.
Activity in the US manufacturing sector expanded in April 2013, although at a more moderate pace than the previous month as evidenced by the ISM manufacturing index declining to 50.7 in the month from 51.3 in March. The decrease in the gauge of manufacturing activity in April was slightly smaller than the decline to 50.6 that had been expected by markets.
The moderation in the headline ISM index in April reflected sharp declines in employment and inventories, while the other main components registered decent gains in the month. Growth in new orders increased in April following the sharp deceleration in the previous month, with the sub-index up 0.9 points to 52.3. The gauge of current production rose 1.3 points to 53.5, although this only represented a partial retracement of the 5.4 point drop seen in March. “Supplier delivery” increased to 50.9 from 49.4 in March, thereby indicating that shipments from suppliers were slower than the previous month (delivery times tend to lengthen as suppliers face capacity restraints). The pace with which firms were running down their inventories increased in April as the “inventory change” component declined 3.0 points to a four-month low of 46.5 in the month. Finally, and most disappointingly, the “employment” sub-index plunged 4.0 points to 50.2, thereby indicating that hiring by manufacturing firms was stagnant in April.
While the further moderation in the ISM manufacturing index in April was disappointing, the details of the report (outside of employment) provided scope for some optimism. In particular, the combination of a contraction in inventories with a pick up in new orders resulted in a sharp increase in the spread between these two components, which is indicative of a pick up in production activity in the coming months. The disappointing read on manufacturing employment growth (or lack thereof), however, followed the weaker than expected ADP National Employment Report released earlier this morning and is likely to temper expectations for a significant improvement in Friday’s April non-farm payroll report from the 88,000 increase recorded in March. The backdrop of limited employment gains and muted inflationary pressures (the ISM’s “prices paid” component declined to the “break-even” level of 50) will keep the Fed in accommodative policy mode, and this afternoon’s Federal Open Market Committee (FOMC) meeting is unlikely to see any changes to the central bank’s stance.
In a separate release this morning, construction spending in the US unexpectedly declined by 1.7% in March (market expectations had been for a 0.6% increase). The drop in spending reversed the previous month’s revised 1.5% gain (initially reported as 1.2%), which itself had partially retraced the sizable 4.0% plunge in spending seen in January (previously reported as a more modest 2.1% decline). The weakness in March was mainly concentrated in the public sector (-4.1%) although private expenditure also declined (-0.6%) as the increase in spending on residential construction was not enough to offset the decline in the non-residential sector.
RBC