US ISM Manufacturing: Back to expansion, but it won’t last – Wells Fargo

Data released on Monday showed a bigger-than-expected increase in the US ISM Manufacturing index. It rose back into expansion territory after six months. A first step toward de-escalation in the trade war certainly helped, but coronavirus worries are not yet showing up in these numbers, argued analysts at Wells Fargo. 

Key Quotes: 

“The ISM manufacturing index came in at 50.9 in January after touching the lowest level since the recession in December. This key yardstick for the manufacturing sector had been in contraction territory for five straight months. So the move to expansion from contraction is certainly welcome, but we are not completely out of the woods with the trade war, and we are only beginning to understand the potential effects of the coronavirus outbreak and what it means for supply chains.”

“The trade war has been the steadiest headwind for the past year or so, and while the ISM survey comments took on a decidedly more upbeat tone in January, the tariffs are still being cited by purchasing managers in multiple industries.”

“The fact that the employment component and order backlogs are still under water (below 50) attests to the fact that a de-escalation is not the same thing as a resolution given a number of tariffs remain in place.”

“While it is still a very fluid situation, the ongoing outbreak of the Wuhan coronavirus is a clear danger for global supply chains. If this episode is no worse that the SARS epidemic in 2002-2003, the impact to domestic production would likely be short-lived.”