The Institute for Supply Management (ISM) manufacturing index dropped 2.1 percentage points to 57.7 in October. Markets were expecting a more modest decline of 0.8 percentage points to 59. Although this marks the second consecutive month of decline in the headline index, overall activity remains consistent with an ongoing healthy expansion in the U.S. manufacturing sector.
With the exception of supplier deliveries, the main subcomponents of the index declined in the month, but still remain at healthy levels. New orders fell 4.4 points to 57.4, and production shed 4 points to 59.9. Employment fell back a bit (-2) to 56.8.
The trade components of the report were disappointing. New export orders fell to 52.2, and imports fell to 54.3. These levels remain well below those recorded at the time the U.S. administration levied tariffs on steel and aluminum imports this past March.
Thirteen of eighteen manufacturing industries reported growth in October. Four industries reported contraction: wood products, primary metals, nonmetallic mineral products, and fabricated metal products.
Key Implications
The U.S. manufacturing sector continues to expand at a healthy pace, although momentum appears to be waning. American manufacturers are facing a number of headwinds that are acting to hold back a further expansion in activity, and the USMCA doesn’t appear to be offering much relief. New tariffs implemented on September 24th on Chinese imports are the latest in a number of challenges cited by survey respondents, which include rising input costs, component shortages, and difficulty finding qualified labor. Moreover, these same constraints are being echoed in other surveys as well, suggesting that the U.S. economy is operating closer to its capacity, with building price pressures becoming ever more likely to be passed along to end users.
More broadly, this report affirms the divergence theme that has driven capital out of emerging markets and into the U.S., strengthening the dollar this year. In contrast to healthy U.S. activity, global PMIs released earlier are signaling a material slowdown in foreign manufacturing activity in October, particularly in China and its supply chain partners in East Asia. As global growth continues to slow from its peak in the first half of this year, a potential escalation in trade tensions between the U.S. and China could result in an even greater slowdown in demand than anticipated, and may result in further bouts of financial market volatility.
