U.S. ISM index favorably biased in Q3 and Q4, once again

Some pullback in the overall U.S. ISM index in Q3 is not overly surprising given the weakness in China and what appears to be a particularly large inventory build in H1. According to the Q2 GDP report, in both Q1 and Q2, inventories rose at just above a 5% annual rate - well above the pace of final goods demand. Also the recent weakness reflected in the China Caixin/Markit manufacturing PMI, currently at a six-year low, sends a negative signal for the ISM index.

As it has been the case in recent years, the ISM index seems to be biased upwards in Q3 and Q4 due to seasonal adjustment distortions. The seasonal boost will continue through H2 2015, says Nordea Bank.

In the past few years seasonal adjustments have tended to push the adjusted ISM index up sharply between July and December, and then to push it back down again. This pattern in the seasonal adjustment factors seems to have become much more pronounced after the Great Recession. 

"The reason is probably that the fierce economic contraction at the end of 2008 seems to be improperly captured as a new seasonal trend by the algorithmic programs used to calculate seasonal adjustments. This seems subsequently to bias the adjusted ISM index favourably in Q3 and Q4 of the year and negatively in Q1 and Q2", suspects Nordea Bank.