July Institute for Supply Management

The July data from the Institute for Supply Management (ISM) was encouragingly strong. Both sides of the economy, service and manufacturing, improved in the period. The ISM uses diffusion indices to illustrate the state of the economy each month. This means that any reading above 50 points to expansion in the relative portion of the economy while a figure below 50 suggests the output contracted for the month. In July, the service and manufacturing tallies were 56.0 and 55.4 respectively.

The service sector sped up from the prior reading of 52.2. The concern in June was the slowdown in new orders. Fortunately, a slowing trend does not appear to be developing as the new orders component jumped nearly 7 points to 57.7, its best reading since December. New orders are important because they lead to new production. It is not as if the economy was waiting for these new orders to become output either; the service sector appears to have gotten off to a good start in the third quarter as business activity surged over 7 points, also putting in its best reading since December.

Manufacturing also accelerated in July as the index jumped 5.5 points over June’s tally. As seen in the service section of the economy, new orders were strong. Also pointing to a strong third quarter start was the production level. The output measure jumped over 11 points to 65.0, which is the strongest reading of the current recovery for this subcomponent. Delivery times were also up; this means it is taking longer for order to be completed. Companies may need to invest in either capital or labor in order to combat the congestion in their supply chains. Both solutions are good for America.

The two segments of the economy appear to have found firmer footing to start the second half of the year. This encouraging news will likely put the central bank marginally closer to reducing its unconventional monetary policy. At some point, the Federal Reserve is going to need to see if the economy can remain upright without the bank’s training wheels, but tapering is not the same as outright removal; the training wheels will just get smaller. (by C. Cox)