HomeISM Manufacturing PMI Reaches Overheating Levels

ISM Manufacturing PMI Reaches Overheating Levels

The first important economic release of the year revealed a resilient economy in the United States. The ISM Manufacturing, the most relevant indicator for the manufacturing sector in the United States, reached levels over 60 in December. 

More precisely, on expectations of 56.6, the ISM Manufacturing indicator printed 60.7 in December last year. This is far from the 50 level that defines a sector that contracts or expands. As a reminder, when the ISM, which is the equivalent of the PMIs in Europe and the rest of the world, falls below 50, the sector contracts. On the other hand, when it reaches values above 50, the sector expands. Normal levels in an expansionary scenario are between 50 and 60. Anything above 60 shows a sector at risk of overheating.

Will the Fed intervene should the rest of the economy recover as fast as the manufacturing did?

Details of the December 2020 ISM Manufacturing Report

For traders, the ISM report has multiple implications. On the one hand, it shows how the sector performs. On the other hand, traders look at the details in the report and put the information together so that they form an educated guess about other economic data to be released.

The ISM reports are particularly important before they usually come out before the NFP report. The NFP is released every first Friday of a month, and the ISM Manufacturing comes out a few days earlier. If the employment component is strong, the implications are that the NFP may also beat expectations.

The ISM Manufacturing report for December 2020 revealed that the employment component rose to the 50 level for the first time since the pandemic. This is tremendously important for the NFP report and suggests that we may see a positive report on Friday.

On top of the strong employment component, inventories declined dramatically in December. This is another positive for the economy as a low level of inventories suggests the economy has more room to grow in the period ahead. If the ADP (private payrolls) beat expectations later today, the market may start to price in a positive NFP report.

How did the U.S. dollar react? Usually, positive economic data is positive for the currency. This time, though, the dollar declined as the market is focused more on the pandemic and the way the Fed responded to the economic crisis.

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