ISM Manufacturing Index Shows Better than Expected Performance in August

The U.S. ISM manufacturing index climbed to 56.3 in August, 0.8 points higher than July and also much stronger than market expectations for a 52.7 reading. A mark above 50 indicates manufacturing activity is expanding; this has been the case for the past 13 months.

The employment sub-index showed a sharp increase, reaching 60.4 from 58.6 prior. The previous 60- mark observed on this indicator dates back to May 2004.

Prices paid increased for a second month in a row, reaching 61.5 from 57.5 in July, but remains well below the 73.5 average registered during January-May 2010.

New orders also remained in expansionary territory, but declined slightly to 53.1 from 53.5 prior. There was also a decline in export orders, which lost one point falling to 55.5.

Key Implications

Today's increase in the ISM manufacturing index breaks a string of three months of continued deceleration and also stands in opposition to recent poor results from the Philly Fed index and durable goods orders.

The brightest spot in the report is the strong employment reading, which supports the notion that manufacturing will continue to underpin job expansions and add jobs in Friday's payroll report. The sector has been a major contributor to net private sector job creation since the recovery started.

The single downside news from today's report was the slight slowdown in both new and export orders. While this suggests some softening going forward in these categories, both remain in expansionary territory. This is consistent not only with subdued growth for the U.S. economy, but also with slower global growth during the second half of the year. The latest manufacturing leading indicators in Europe and China have already signaled a weaker expansion for this sector at a global scale in the coming months.