The second straight sub-50 ISM reading indicates that the US manufacturing sector may have slipped into recession. Leading indicators point to sustained near-term weakness. But as long as broader measures of economic activity suggest that the weakness is largely confined to this sector, economists continue to look for the next Fed rate hike in March.
Second consecutive ISM reading below 50 since 2009 suggests that the US manufacturing sector may have slipped into recession, driven by the stronger USD, weak foreign demand, and reduced orders from the energy sector. The ISM manufacturing index fell to 48.2 in December, the weakest since June 2009. But fortunately manufacturing is only around one-eighth of the US economy. Through November, the weakness in manufacturing had not spread to the non-manufacturing sector - the other seven-eighths of the economy.
Broader measures of activity continue to indicate that manufacturing weakness is contained. Thus, the Conference Board's index of coincident indicators rose at a solid 2.5% annual rate in the last three months to November. At 55.9, the November ISM non-manufacturing index also signals that there is still only limited spill-over from manufacturing weakness into the rest of the US economy. Also the continued solid trend in jobless claims suggests that the majority of the economy is doing fine. At 277k, the recent 4-week average is consistent with nonfarm payrolls growth north of 200k per month. (Even though initial jobless claims jumped by 20k to 287k in the week ending 26 December, there is little reason to be concerned about the health of the job market.
The claims data can be volatile this time of year because of seasonal adjustment difficulties during the holiday season and early in the New Year.
"We believe the US economy is still growing at least ¼-½% point above our 1¾-2% estimate of its potential, consistent with a continued downtrend in unemployment. As long as overall growth remains solid, the Fed is likely to look past the weakness in manufacturing. Thus, we continue to expect the next Fed rate hike in March after the initial hike in December", says Nordea Bank.
