U.S. ISM Manufacturing Index Retreats, but Stays in Expansionary Territory

The ISM manufacturing index declined to 53.6 in November from 55.7 in October. Expectations were for a more moderate fall to 55. New orders rose to 60.3 from 58.5 in October and prices paid declined to 55 from 65.

The index remains above the 50-mark, suggesting that the manufacturing sector is in expansionary territory. While production declined from October’s 63.3 reading, it remained at a robust 59.9. Employment retraced some of October’s gains with a 50.8 reading following the prior month’s 53.1. The rise in new orders offered some encouraging news; the forward-looking component increased to 60.3 in November from October’s 58.5. The report also pointed to easing inflationary pressures; the prices paid component declined to 55 from October’s 65 reading.

Although today’s ISM manufacturing Index release disappointed expectations, it remains consistent with our view that the U.S. economy is continuing to recover in the fourth quarter. The ISM is in expansionary territory in each of the two months in the final quarter for which data are available. Additionally, the fourth quarter was ushered in with a 0.7% monthly gain in personal spending for October. We expect the U.S. economy to expand at 2.6% annualized rate in the final quarter of the year. The labour market, however, remains weak. To promote job creation and help bring down the unemployment rate, we expect the Federal Reserve to remain on hold until the fourth quarter of 2010.

Other reports this morning

Two other reports out this morning had some positive news on the housing sector. The flat reading for construction in October surpassed expectations of a 0.5% decline. Private residential construction rose a healthy 4.4% in the month. This positive news was, however, somewhat tempered by the significant downward revision to September’s reading (revised from 0.8% to -1.6%). Pending home sales registered 3.7% monthly gain in October compared to the -1% expected within financial markets.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.