With all five District Bank surveys of manufacturing in June showing a rebound, the stage is set for the ISM Manufacturing Index to climb within reach of the 50-mark when those numbers are reported at 10:00 ET on Wednesday. It is not unreasonable to anticipate the index will show narrow expansion in the June data after the 43.1 in May. My expectation would be for a reading of 50.5.
The average of the five District Bank survey headline indexes was 4.4 in June after -37.4 in May (correlation 0.886). All were significantly higher than the prior month and reflected substantially better new orders. However, I would be cautious about interpreting this as the factory sector decisively emerging from recession. There was probably a lot of pent up demand after the shutdowns in activity that began in March. A rebound in June could simply be catching up from levels that were suppressed by stay-at-home orders and businesses needing a little time to reassess and repurpose their activity. More likely, it will be a signal that economic fundamentals are reasserting that growth is there, just restrained by the dislocations of the global pandemic.
The late in the second quarter improvement in manufacturing will not save GDP from a deeply contractionary reading when the advance data is released at 8:30 ET on Thursday, July 30. Nor does it presage the longed-for V-shaped recovery with a positive GDP reading for the third quarter. Nonetheless, this and other upside surprises – notably for the housing market where low mortgage rates have been a boon – mean that the dire expectations for the economic contraction in the second quarter are going to become merely very bad. A month out from the advance report, the New York Fed Staff Nowcast – which is one of the better GDPnow estimates as a predictor of the actual number – is at -16.33% for the second quarter. This is vastly better than earlier estimates of a drop of 40% and more. GDPnow forecasts are moving targets and need several grains of salt to digest, especially when relatively few data points are available. But it does look like the quarter will be a mirror image of the first quarter which started off strong and finished weaker than originally anticipated.
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