The ISM Index's big July surge

Manufacturing, housing, export data all pointing in the right direction

08/06/2013


Three interdependent signs that the U.S. economy is gaining momentum all pointed toward positive growth in July. Housing prices continue to increase as the glut of foreclosed homes in the market subside and higher-quality housing now is available. The U.S. trade deficit dropped more than 20% in July to its lowest level in more than four years. So it should have been no surprise to see the monthly ISM manufacturing index rocket to its highest level in three years.

The jump in the ISM Index from 50.9% in June to 55.4% in July was one of the largest single month increases since the market began to recover after the 2008 economic collapse. After a big run-up at the start of 2013 and an equally sharp decline at the end of the first quarter, the ISM Index is solidly in positive territory, and the signs are pointing to its continuation.

The strength of the manufacturing sector is clearly seen in the underlying data behind the ISM surge. New Orders increased in July by 6.4 percentage points to 58.3%, and the Production Index was up 11.6 percentage points to 65%. The Employment Index was at 54.4%, well above the 50% threshold, and the Prices Index, which measures raw material costs, fell 3.5 percentage points to 49.0%.

All this comes at a time when Reuters is reporting the U.S. trade deficit dropped 22.7%, fueled by exports to China and Brazil increasing by more than 4% and exports to Europe up almost 2%. While the focus on the trade deficit with China captures a great deal of attention, the strength in exports to Europe might be more important to longer-term growth.

While Germany has remained solid throughout most of the global economic crisis, instability in other European Union nations—Spain, Portugal and Greece come to mind—have slowed overall EU growth, which has an impact on U.S. manufacturers as well. If Europe continues its gradual rebound, that’s good news for U.S. manufacturers as well.

A strong rebound in housing also bodes well of the U.S. manufacturing market. The housing collapse led us into the economic crisis, and economists have been waiting for consistent growth in that segment to help boost production of key new housing components.

That finally appears to be happening, as housing prices have climbed upwards of 20% in some California cities and in the Southwest, where the effects of the 2008 collapse were most acutely felt. Home prices are on the rise elsewhere in the country as well. 

The Last 12 Months

The Institute for Supply Management's July index showed an increase of 4.5 to 55.4 for the month of July thanks to improved economic signs. Courtesy: ISM



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