March’s ISM reading of 57.2% was down from 57.7% in February and matches the anticipated 57.2%. This represents the seventh consecutive monthly increase. The important production index fell to 57.6%, while the new orders index experienced a small step back to 64.5% from 65.1%. The employment index was stronger at 58.9%. Comments from the respondents were again exceptionally optimistic about current and future demand, though transportation is facing some difficulties (also highlighted in recent automobile sales activity).
Bottom line: According to the ISM, an index reading of 57.2 (average for 2017) is consistent with GDP growth of 4.3%. Though looking at the latest Atlanta Fed’s GDPNow forecast for the first quarter, this still seems a little off, with GDP tracking at 0.9%. Nevertheless, today’s report was strong and suggests there is still plenty of upside momentum here. While this report is often placed in the ‘soft’ data camp, as there is some subjectivity to it, in reality it is probably somewhere in between the ‘hard’ and the ‘soft’ data, as survey results show the net-change between those seeing an improvement from the previous month and those that see a decline in activity. Hence, it has historically been a good measure of the prevailing direction of change, rather than the rate of change itself. We would, however, still like confirmation of this in terms of improving factory orders and industrial production. For the Fed this is still very positive.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.