- The ISM manufacturing index declined to 47.8 in September from 49.1 in August, undershooting consensus expectations for a slight improvement to 50. September marks the second consecutive month of contraction in the headline composite index, and the reading of 47.8 is the lowest since June 2009.
- The decline was broad-based, with four of five of the subcomponents remaining in contraction in September. Inventories declined the most, falling 3 points to 46.9. Production fell 2.2 points to 47.3, while employment shed 1.1 points leaving the index at 46.3. New orders rose a tenth of a point to 47.3, but remained firmly in contraction.
- Prices paid improved (+3.7 to 49.7) for the second consecutive month, but still signal a contraction for the fourth consecutive month. The contraction in September was concentrated in oil, paper products, plastics, and steel and aluminum products.
- New export orders fell 2.3 pints to 41, the lowest reading since March 2009. Import orders improved 2.1 points to 48.1. Both indexes remain firmly in contractionary territory.
- Of the 18 manufacturing industries only three reported growth in September, down from half in August. Fifteen industries reported contraction in the month, up from seven in August.
Key Implications
- This was not the report we were looking for. September’s report signals that U.S. manufacturing weakness has deepened and broadened to encompass almost every industry. The persistence in new orders to the lowest level since June of 2012 signals little optimism for improvement in manufacturing output in the months ahead. The negativity in the index values was affirmed in the comments by respondents. Demand has clearly slowed, staff are being laid off, and new tariffs are at least partly to blame for boosting operating costs and generating some shortages.
- Manufacturing sentiment surveys released this morning confirmed that the world remains mired in a manufacturing slump. Manufacturing output is contracting in most of the world, with activity looking to have worsened in September. With the next wave of tariff escalation scheduled to come mid-month sentiment is unlikely to receive a material boost unless trade negotiations between the U.S. and China produce a very positive result.
- Overall, today’s data is just another indication that the global manufacturing slump has officially arrived stateside. A couple more points off the headline index would signal that the U.S. economy is at the precipice of an economy-wide contraction in output. Given recent events, it’s difficult to imagine a situation where political and trade policy uncertainty lifts sufficiently to see a quick rebound in global demand for U.S. manufactured goods. As such, we anticipate that U.S. manufacturers will continue to feel more pain from soft foreign demand and less sturdy domestic demand at least through the end of this year.
