In July the two ISM indices jumped strongly erasing the weak period seen from February to June 2013. The manufacturing index was at 55.4 in July versus only 50.2 on average for the second quarter and the non manufacturing index was at 56 versus an average of 53 in Q2.
The first chart clearly shows that the main change was seen on the manufacturing sector. This is the most volatile index. We can see that as two months ago the index was below 50 (49 in May and only 50.9 in June).
The main question is to wonder if this jump in both indices was a change in regime or a simple catch up? We see on chart 2 that there is a strong consistency between the ISM global (weighted average of the two ISM) and the 6 month change for GDP.
Therefore this point is important after a disappointing growth figure for the first half of this year. (The carryover growth for 2013 at the end of the second quarter is just above 1% (1.05%)).
If it is a simple catch up after a weak second quarter for the ISM indices this means that growth will not spontaneously accelerate. If this is a change in regime then we can expect that growth will be stronger in the second part of the year.
Charts 3 and 4 suggest that it is probably a catch up. See below
Good news were the rapid improvement in the New Orders indices for both the manufacturing and the non manufacturing sector. The weighted average jumped to almost 58 (57.8). But the 3 month average remains low and the upside seen in July is just a catch up after a very poor June number.
The Employment index does not accelerate. The purple line on the chart does not show a rapid improvement that could let expect stronger numbers for private payrolls in the coming months.
In other words, my guess is that good numbers for July were more a catchup than a change in regime. Growth numbers will be positive in Q3 and Q4 but there will be no rapid acceleration. This will have an impact on employment as I do not expect more rapid employment figures than what have been seen in the recent past. The labor market will not create 200 000 jobs each month on average until the end of the year. This could be key for observing the convergence to the 7% threshold (this is the unemployment rate at which the Fed will stop its asset purchases). The Fed’s behavior will be interesting to follow.