US Manufacturing Sector Growth Unexpectedly Picked Up in August

09/01/10 - The ISM manufacturing index indicated that the sector grew for the thirteenth-consecutive month, and the pace of expansion unexpectedly increased as shown by the index rising to 56.3 in August from 55.5 in July (a reading above 50 indicates the sector is generally expanding). Market expectations going into today’s report were for a decline in the index to 52.8. The employment component continued its upward trend, rising to 60.4 from the previous month’s reading of 58.6, its highest level since December 1983.

The manufacturing sector expanded for the thirteenth-straight month in August, and the pace of growth increased as the ISM manufacturing index rose to 56.3 following July’s reading of 55.5.  The new-orders component eased slightly in the month to 53.1 from 53.5, while production increased to 59.9 from July’s 57.0, breaking a string of three-straight monthly declines. Manufacturers’ inventories expanded for the second-consecutive month, with the inventory index rising to 51.4 from 50.2 last month. With respect to inflationary pressures, the prices paid component rose to 61.5 from July’s 57.5 reading. The manufacturing sector continues to support employment growth, as the jobs component rose to 60.4 from the previous month’s reading of 58.6, its highest level since December 1983.

Today’s ISM manufacturing report suggests that the goods-producing side of the U.S. economy continues to expand in the third quarter of 2010 and that the pace of growth is not fading as previously expected, suggesting that the sector will continue to provide support to the economy. On the jobs front, the improvement in the employment sub-index contradicts the ADP report that indicated manufacturing employment declined for the second-straight month in August. We expect Friday September 3, 2010’s August Private Sector Employment Report will continue to increase, although moderating to 38,000 from a 71,000 rise in July. This continued weakness in employment likely means that the unemployment rate will remain elevated in the near term and, given the persistently subdued inflationary pressures, we continue to expect the Fed funds target to remain in its current 0.00% to 0.25% range well into next year.

In a separate release this morning, the ADP National Employment Report showed U.S. non-farm private payroll employment unexpectedly declined, falling by -10,000 in August compared to market expectations for a gain of 15,000. This result represents the first monthly decline since January’s 82,000 drop. As well, the gain seen in July was revised down slightly from the initially reported 42,000 to 37,000.

In another report out today, U.S. construction spending fell for third-consecutive month in July, dropping 1.0% to its lowest level since July 2000. Market expectations were for a smaller decline of 0.5%. June’s initially reported 0.1% increase was revised down significantly to show a -0.8% decline.  The weakness in July came from both public spending (-1.2%) and private spending (-0.8%) and in both residential (-2.5%) and non-residential (-0.3%) sectors.