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Markit’s composite purchasing managers index of US activity for February fell sharply, suggesting that the American economy continues to weaken, but there are reasonable grounds to suggest that this indicator is possibly pointing the wrong way. Two other organisations publish similar series – the Institute for Supply Management (ISM) and the National Association of Credit Managers. Both have a much longer history than Markit’s measure, especially the former, and have been much less volatile in recent years. Both were also broadly stable in February and up from their recent lows.

Within these composite series, the ISM manufacturing index has the longest data set. Its recent trend is encouraging and may be starting to point to better growth ahead for the US economy. Two aspects in particular are reassuring. Firstly, the New Orders component, which tends to lead production, turned up a month ago and has now been above 50 for two months, implying renewed expansion. Furthermore, the ISM manufacturing index tends to exhibit cycles of slowdown followed by rebound linked to inventory cycles. The latest period of slowing fits the pattern seen over the last two and a half decades almost perfectly and suggests manufacturing may be turning up, right on cue.

ISM Manufacturing Index months from peak vs last 5 cycles


Source: Institute for Supply Management

The fear amongst investors has been that the US recovery will be fatally undermined by manufacturing weakness. A more optimistic scenario is that strong consumer real income growth and reasonably resilient service sector activity will support demand long enough for manufacturing to recover. This is beginning to look a little more likely.

Nothing to fear, but fear itself >

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