Weak US ISM manufacturing in November puts Fed in difficult position

The US manufacturing ISM in November declined to 48.6 in November from 50.1 in October (Forecast: 50.3, consensus: 50.5), which is the lowest level since June 2009. It is also the first time since 2012 that the ISM manufacturing index fell below 50. Most regional manufacturing indices and the order-inventory balance from October indicated that ISM would stay above 50, so today's weak ISM index was unexpected. The manufacturing sector still suffers from a combination of the very strong USD and the slowdown in manufacturing globally (and especially in China).

The subcomponents were overall weak. New orders declined from 52.9 in October to 48.9 in November. Production declined from 52.9 to 49.2. New exports stayed weak at 47.5 in November. On a positive note, the employment component increased from 47.6 to 51.3 and is again above 50 indicating further growth in manufacturing. However, the employment index is still weak.

The Markit manufacturing PMI in November was more encouraging as the final figure in November was revised up slightly to 52.8 from 52.6 in the flash estimate. The two different purchasing manager indices paint a very different picture of activity in the US manufacturing sector. The greatest focus is on the ISM, as this is oldest with the longest history, while the Markit PMI is quite new. Although the weights of the subcomponents are different, it may suggest that ISM has fallen too.

The weak ISM manufacturing index in November puts the Fed in a difficult position. On the one hand it has never increased the Federal funds rate when ISM manufacturing was this low. On the other hand the domestic part of the economy is booming. The non-manufacturing ISM index in November is due on Thursday but was at 59.1 in October, indicating solid growth.

"We think the Fed will put more weight on the ISM non-manufacturing index due on Thursday. In 2014 manufacturing only accounted for close to 14% of gross value added in the US while services and construction together accounted for nearly 82%. Employment within services accounts for over 86% of total nonfarm payrolls while employment within manufacturing accounts for only 9%",says Danske Bank.

Attention will now be on Thursday's non-manufacturing ISM index in November and Friday's jobs report for November. If both are very weak as well it will be much harder for Fed to justify a hike in December.

"We expect a small decline in ISM nonmanufacturing to 58.0 in November from 59.1 in October (consensus: 58.0) and that nonfarm payrolls increased by 175,000 in November (consensus: 200,000). This should be enough for the Fed to feel comfortable raising rates at the December meeting despite the very weak ISM manufacturing index. That being said, there is no doubt that today's weak ISM will raise eyebrows among the FOMC members", added Danske Bank.