The ISM manufacturing index fell slightly more than expected by the economists’ consensus in November: from 58.7 to 58.2 against expectations for a decline to 58.4. It is the second consecutive drop for the index, after reaching the 13 years high in September at 60.8. However, sub-indices have depicted a better picture, signaling that a rebound for the overall index is possible in December. The new order index rose from 63.4 to 64, the production index from 61.0 to 63.9, while the employment index remained almost unchanged at 59.7. Finally the prices index declined from 68.5 to 65.5, signaling lower inflationary pressures.
Despite the November decline, the ISM manufacturing index remains at a value in line with solid perspective for the US economy. According to the ISM institute “The past relationship between the PMI and the overall economy indicates that… if the PMI® for November (58.2 percent) is annualized, it corresponds to a 4.7 percent increase in real GDP annually.”
However, in our view, the decline of the index is a sign of cautious for the S&P500. As indicated by the following chart, a trend reversal of the ISM manufacturing index has been followed in the past also by a trend reversal of the US equity market as the possibilities of a recession increase.
On the contrary, a downward shift of the ISM could favor a decline of long-term government bond yields as expectation of weaker economic activity ahead could anticipate easier monetary policy and lower inflationary pressures.