Not your father’s ISM survey

February 1, 2012

Manufacturing activity picked up in January, an encouraging sign for U.S. growth prospects. Right? Perhaps not as much as it used to be. The shrinking role of factory production in the U.S. economy – now just over a tenth of the nation’s output – means the Institute for Supply Management’s closely watched survey is a less sturdy predictor of broader trends.

Neil Dutta, U.S. economist at Bank of America-Merrill Lynch, explains:

The ISM Manufacturing Index improved to 54.1 in January from 53.1 in December, the highest since June 2011 and broadly in line with market expectations. A level of 54.1 on ISM is consistent with roughly 3.5 percent real GDP growth. This tells you more about the state of the manufacturing sector than the broader economy, in our view. And, we are skeptical the pick-up in the ISM manufacturing index is a harbinger of a coming acceleration in economic growth.

A 3.5 percent rate looks lofty indeed: Current expectations according to Reuters polls are for a 2 percent GDP reading in the first quarter, with a number of analysts citing downside risks to their forecasts.

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