Manufacturing expands at a solid pace

The ISM manufacturing index was stronger than expected in August, improving to 56.3 from 55.5 in July.

The new orders index moderated slightly to 53.1 in August from 53.5 in July, however, employment growth picked up to 60.4 from 58.6. Also, the production index strengthened to 59.9 from 57.0.

BOTTOM LINE

The double-dip thesis that has dominated recent market movements received a solid blow with the August ISM manufacturing report. Although the report was slightly tarnished by a further slowdown in order growth, the report nonetheless pointed to fairly robust expansion in production and employment (the latter was particularly strong since you have to go back 37 years to see a stronger reading on manufacturing employment). Manufacturing continues to be the strongest growing sector in the recovery and this report suggests that the manufacturing data will look fairly robust in August (which is particularly welcome news after the weak July report on durable goods orders). On the inflation front, with the further pickup in prices paid, there is no evidence of price deflation. The employment report on Friday will bring more evidence about activity in the manufacturing sector (employment has risen for seven straight months in manufacturing through July) and, although we look for a very modest gain in private payrolls of only 25,000 in August, it looks likely that the manufacturing sector will show a pickup in employment.

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