US ISM manufacturing index edges down slightly

The very modest decline in the ISM manufacturing index, to 50.1 in October from 50.2 in September, illustrates that the strong dollar and weak global demand are still weighing very heavily on the factory sector. Moreover, there is nothing that points to a bounce back any time soon. The impact of the dollar's surge on prices may fade soon, but the impact on real activity will linger until well into next year.

Nevertheless, manufacturing is not a lot more than 10% of the overall economy and the much bigger non-manufacturing sector has been holding up quite well. This is reflected in the 0.6% m/m increase in construction spending in September, which was also released this morning.

 The details of the ISM report were rather mixed. The increase to 52.9 last month from 50.1 in September in the most forward-looking new orders index is quite encouraging. The gain in the production index to 52.9 in October from 51.8 in September is also good news. The export orders index rose to 47.5, from 46.5, but it remains significantly lower relative to the beginning of the year.

"This only reinforces our view that we won't see any meaningful contributions to GDP growth from net trade in the coming quarters. Most disappointingly, the employment index dropped to 47.6, from a 50.5. This suggests that the weakness we've seen in manufacturing payrolls over the past few months may have worsened in October", says Capital Economics in a research note.

Elsewhere, construction spending increased by 0.6% m/m in September, driven by a solid 1.8% m/m increase in residential spending. Unfortunately, non-residential spending declined by 0.1% m/m but this was in line with what the assumption that the BEA had built into its third-quarter GDP estimate.