July PMI Data Shows Recovery Chugging Along

We’ve written quite a bit lately about the deterioration in high-frequency data. Indicators of mobility (such as auto and air travel, commuting activity, restaurant diners, etc.) leveled off in July due to the latest wave of COVID-19 cases. The strong rebound in the job market reflected in May and June jobs data has faded, based on the increase in continuing claims reported last week by the US Bureau of Labor Statistics.

But this week’s data from the Institute for Supply Management (ISM) suggested that the economic recovery remained very much intact last month, even if more people chose to stay home.

The Institute for Supply Management’s Purchasing Manager’s Index (PMI) for manufacturing, reported on August 3, came in at 54.2, up from 52.6 in June, and solidly in expansionary territory. The more forward-looking orders component of the report jumped 5.2 months from the prior month, a sign that the positive momentum may continue for manufacturing.

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The services ISM, reported yesterday (August 5), was even stronger. As shown in our LPL Chart of the Day, the ISM Services Index rose from 57.1 in June to 58.1 in July, including a 6.1 point increase in orders. This underrated economic data point deserves more attention than it gets given that services represent a much bigger piece of the US economy than manufacturing.

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“This week’s ISM data suggests that the economic recovery remained on track last month despite signs of fading momentum from high-frequency data,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “The manufacturing recovery bodes well for the near-term earnings outlook, while the services rebound is particularly impressive given social distancing constraints.”

This isn’t just a US story, as the JPMorgan global PMI indexes for manufacturing and services moved back above 50 in July for the first time since January 2020.

Still a Ways to Go

Importantly, while this data points to economic conditions improving, these are diffusion indexes that measure “better” or “worse” and do not take into account the level of activity. The US economy is recovering from a very low base, and its major components still have a ways to go to recover lost output from the pandemic. These data points are positive signs and reflect clear progress, but unless we get a timely vaccine and can end social distancing, a return to pre-pandemic levels of output may still be more than a year away.

For more of our insights into the economic outlook, check out our Midyear Outlook 2020: The Trail to Recovery.

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