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ISM PMI shows continued contraction in the manufacturing sector

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 1, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Mumbai) - The ISM PMI released today showed a contraction in the manufacturing sector for the third straight month in January. The index measuring the national factory activity increased to 48.2 from 48.0 seen in December. However, the good news is that both production and new orders has managed to move past the 50 mark threshold. The new orders index rose to 51.5, the highest since last August, from 48.8. The prices paid index however remained unchanged at 33.5.

    Employment in the sector dropped to a six-and-a-half year low raising the fear that overall employment rate has probably dropped in the month of January ahead of the jobs report due this Friday. The index mesuring employment fell to 45.9 from 48.0,marking the lowest reading since June 2009. Economists had expected the readng to come in at 48. It is being feared that the overall payrolls might not have increased 190k in January as is being broadly estimated.

    All indicators assessing manufacturing growth in the US released in in the previous months have revealed a slowdown in this sector. The manufacturing sector in has suffered in the recent times on account of slowing global growth as well as the strong US dollar which has led to lower demand from overseas. Low oil price has also been an important factor that has checked increase in manufacturing activity.

    U.S. economic growth slowed down sharply in the fourth quarter with economy growing 0.7 per cent hit by rising inventory which resulted in a loss of appetite among manufacturers to restock. This impacted overall factory activity. Strong dollar and weak global economic outlook hurt exporters.

    Moreover, lower oil prices can be expected to have hurt profit margins of energy firms that over the last few months have been compelled to reduce their capital spending budget. Oil prices have fallen 70 per cent from their peak in June 2014 and have hit multi year lows in the recent past. This affected investment in the energy sector.

    Higher savings boost expectation for increase in spending

    Separately, a report by the Commerce Department showed U.S. consumer spending remained unchanged in December after registering a 0.5 per cent rise in November. Spending on long-lasting manufactured goods fell 0.9 percent. Purchases of non-durable goods also dropped 0.9 percent.

    Consumer spending moved up 0.1 percent in December when adjusted for inflation. It had gained 0.4 percent in November. Annual calculations show consumer spending increased 3.4 percent in 2015, lower than the 4.2 per cent increase seen in 2014.

    Savings however increased considerably in December rising to a three year high. It fueled expectations that consumption will eventually rebound in the coming months.

    Wages and salaries rose 0.2 percent after having increased 0.5 percent in November. Income rose 0.3 percent in December. Income in 2015 increased 4.5 per cent in December, marking the largest increase since 2012. Also, households’ disposable income in 2015 after accounting for inflation recorded its biggest rise since 2006. Savings surged to $753.3 billion, the highest level since December 2012 as income outpaced spending. The increase in savings can be expected to drive spending in the early months of 2016.
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