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Recap: District Bank surveys of manufacturing tell two different stories about activity

All five of the District Bank surveys of manufacturing are in, but it is hard to reach any solid conclusions for the outlook for the ISM Manufacturing Index for July when it is released at 10:00 ET on Thursday.

Three of the five headline indexes were up in July from June. The Philadelphia general business conditions index jumped to 21.8 in July from June, and the neighboring New York index recovered a lot of lost ground with an increase to 4.3 after -8.6. The Dallas Fed’s manufacturing activity index improved to -6.3 from -12.1 in the prior month. However, these are all reports of manufacturers’ sentiment regarding conditions.

The two indexes that were down in the month composites and calculated from components. The Richmond Fed’s Composite Manufacturing Index fell to -12 in July from 2 in June. The Kansas City Manufacturing Index was in fact little changed at -1 after 0, but these are both weak readings.

Among these reports, it is Philadelphia and Richmond that have the best correlation with the ISM number. But these moved in opposite directions and told two very different stories of conditions.

When I look at the ISM equivalent indexes – calculating an ISM equivalent from the regional detail indexes that most closely align with the national report – two suggest the ISM Manufacturing Index will rise, two point to a lower reading, and one suggests activity at the national level will be flat.

The strongest correlation is with the Philadelphia equivalent and that points to a solid increase (59.7 in July after 55.8 in June). The second strongest is from Richmond (48.4 after 53.5) and that points to a weaker ISM report. The Dallas equivalent was unchanged (51.5), suggesting continued sluggish expansion. Kansas City leans toward weaker conditions (49.1 after 50.6), and New York to mild firming but still contracting (49.0 after 48.4).

The upshot is that I think that the Richmond report is something of an outlier, probably inclusive of a slowdown in activity that took advantage of traditional summer factory shutdowns. Underlying activity is probably slow, but not that slow. Likewise, the resurgence of confidence in the Philadelphia report is probably related to a surge in new orders that I would not look to be maintained into the next month.

I would look for the ISM Manufacturing Index to chart a course between the two extremes. On net, I would not be surprised to see the national measure tick down again and barely remain above a neutral 50-reading.


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