The Non-Farm Payrolls (NFP) week is here and, as usual, the ISM data offers a glimpse into what to expect next Friday. At least the ISM Manufacturing comes out the same week, and often, like it is the case this week too, the ISM Non-Manufacturing is released as well.
The two releases are important when looking at the details within the sectors. In particular, the employment component is closely watched as it offers clues about the NFP at the end of the week.
Growing Manufacturing Sector in August
The ISM, as a diffusion index, shows the sector’s activity relative to the 50 level. Above means expanding territory, below means contracting one. In August, all sub-sectors grew, albeit some caveats exist.
The strongest performance in August came from the New Orders component. It reached 67.6 when compared to the 61.5 seen in July – a staggering development.
However the traders’ focus sits with the employment component. While on the rise, from 44.3 in July to 46.4 in August, it remains in contractionary territory, well below the 50 level. Anyway, the rising trend is encouraging, and now the focus shifts to the upcoming job-related data until the NFP on Friday.
The ADP is released in a couple of hours from now. If the private payrolls beat expectations and show a rising trend, the economic news comes to reinforce the positive developments seen in the manufacturing sector.
But the manufacturing sector is not the dominant one in the United States. Like any developed economy, the services sector is key to economic growth as it has a bigger influence on the country’s GDP. Hence, on Thursday, the employment component on the ISM Non-Manufacturing will bring another clue ahead of Friday’s release.
Coupled with the Initial and Continuing Claims on the same day, the services sector’s data end the jobs-related data stream ahead of the NFP. At that point, investors have a clue about what the NFP will show and, more importantly, start positioning for the release.
This is a process that investors repeat every month. The aim is the same – to keep digging for clues and put together the economic data so as to find the right positioning for the NFP.
Some investors look only for big changes in trend. They have a longer time-horizon for their trades. But for short-term speculators, correctly interpreting the data is crucial for profitable trading.