November 1, 2013 5:17 pm

US manufacturing data support case for earlier Fed taper

Data appear to show that political turmoil has had little impact on real economic activity©AP

Data appear to show that political turmoil has had little impact on real economic activity

US manufacturing grew more rapidly than expected last month, offering ammunition to economists betting that the Federal Reserve will move sooner, rather than later, to slow support for the recovery.

The Institute for Supply Management’s index of industrial activity edged up from 56.2 in September to 56.4 in October, reaching its highest level since April 2011. A figure above 50 indicates growth.

Forecasters were predicting a decline in the index because of the two-week partial government shutdown and close brush with a debt default that doused the US economy with policy uncertainty throughout the first half of October. A key measure of consumer confidence from the Conference Board took a big dip last month, and a separate manufacturing survey produced by Markit showed growth slowing, suggesting that the political conflict had an adverse effect on the economy. But there was no such evidence in Friday’s ISM index.

“The tone of this report was unambiguously strong, and the underlying message appears to be that the political turmoil in Washington has had no impact on real economic activity,” said Millan Mulraine, director of US research and strategy at TD Securities, an investment dealer.

The ISM survey reflected only the sentiments of US manufacturing executives, so economists will wait for harder data and many more signs to conclude that the recovery has largely shrugged off the political disruptions coming from Washington.

But better than expected data are likely to move Fed officials towards slowing, or tapering, the rate of their bond purchases earlier rather than later – and possibly even at their next meeting in December. This week, Fed officials kept asset purchases steady at $85bn a month but delivered a statement that offered a mildly positive assessment of the economic outlook. This was widely judged as leaving open the door to an earlier tapering move compared with predictions that the Fed could stay on hold until March.

“We believe the thresholds to taper are not as high as some think but we see a relatively low chance that the data will be strong enough to allow tapering in time for the holidays, said Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch, in a note to clients sent just before the ISM data were released.

James Bullard, president of the Federal Reserve Bank of St Louis, said, in a speech on Friday, that any decision by the Federal Open Market Committee to taper asset purchase was “data dependent” – particularly when it came to progress in the labour market.

“To the extent that key labour market indicators continue to show cumulative improvement, the likelihood of tapering asset purchases will continue to rise,” Mr Bullard said. “The committee also wants reassurance that any progress made in labour markets will stick,” he added.

The components of the ISM index were somewhat mixed. New orders and new export orders grew faster, while production and employment grew at slower paces compared with the previous month. Prices also increased at a slower pace. But economists still cheered.

Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi, said: “56.4 today is a strong sign that companies remain focused on business and are not overly concerned about what Washington is, or is not, doing.

“We remain confident about the outlook going forward. The output loss in the fourth quarter may be less than feared earlier.”

Anecdotal evidence from the participants in the ISM survey showed a divide on the impact of the shutdown. Textile producers said “new business is booming”, while makers of metal products said “the government shutting down and threatening to go into a default position is causing all kinds of concerns in our markets”.

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