Todays PMI Release Could Shape Expectations for the US Economy

Today’s PMI Release Could Shape Expectations for the US Economy

The ISM United States Manufacturing Purchasing Managers Index is due and expected to moderately increase to 48.6 from the previous month's reading of 46.8. This may indicate that the US manufacturing sector is slow, yet on course for an improvement since the index is still expected to fall below the 50-mark showing contraction.

The ISM Manufacturing Purchasing Managers Index is a "survey of over 400 companies, covering employment, production levels, inventories, new orders, and supplier deliveries," one of the key indicators of business conditions in the US manufacturing sector. The ISM PMI relies on the NAICS listing and thus tracks a broader range of industries than other PMIs.

Given the consensus forecast for a rise in the PMI, this could be evidence that this sector is beginning to stabilize after recent declines. The continued reading below 50 may indicate that still, manufacturers struggle, especially in terms of demand and supply chain constraints. As in previous months, if this uptick trend continues, modest improvement in employment may be realized, though companies might still be very cautious about ramping up hiring until a more sustained recovery is evident.

The forecasted gain of PMI may affect the US dollar, too. The stronger-than-expected PMI reading can add strength to the optimism about the US economy and, therefore, result in a plus effect in US dollar quotes. However, if the index stays below the expectations or only has minor improvement, it might have a depressing effect on the dollar, particularly versus those currencies whose economies showed more promising manufacturing statistics.

Other possibilities include the Federal Reserve interpreting the PMI to be an indicator of future moves in the broader economy, hence guiding monetary policy. If the PMI continued to expand for a few more months, this would be interpreted to signal that manufacturing was bouncing back and hence likely deserving some hawkishness by the Fed. Conversely, if the index remains subdued, the Fed might consider keeping the policy accommodative or even enhancing such measures to support economic growth.

With the release of the PMI, market participants will likely focus on how the data meets or fails to meet expectations. The outcome could be critically telling for the trend that would be seen in the US manufacturing sector, and any possible spill-overs into the general economy. Today's report might suggest an early recovery, but the way ahead is really unclear, with future readings of the PMI likely to play a significant role in shaping economic expectations.