The Institute for Supply Management (ISM) manufacturing index dipped 1.5 percentage points to 59.8 in September, still in line with the healthy levels seen over the past year. Markets were expecting a weaker reading, and this was only a hair worse.
The main subcomponents of the index were a mixed bag in September. The largest declines were in prices paid (-5.2) Supplier deliveries (-3.4) and new orders (-3.3). Increases were posted in new export orders (+0.8), production (+0.6), imports (+0.6) and employment (+0.3).
Pulling back the lens on the trade-related components, new export orders and imports gained some ground after August weakness, but both remain below their levels six months ago when Washington levied tariffs on steel and aluminum.
Of note, the decline in prices paid was the biggest one-month decline since June 2017, and the index stands at a 10-month low. There was also a decline in the backlog of new orders and supplier delivery times, signaling factories are catching up with demand, helping to dissipate price pressures.
Key Implications
The U.S. manufacturing sector may have come off the boil a bit in September, but it is still expanding at a healthy pace. While trade distortions appear to have eased somewhat in September, the survey was likely conducted before the latest round of tariffs on Chinese imports and corresponding retaliation were finalized, therefore we are not out of the woods yet on tariffs playing havoc on supply chains.
The newly minted USMCA (the rebranded NAFTA deal reached last night) will likely assuage some fears for more North American-oriented manufacturing sectors, in particular the auto sector. It remains to be seen how this positive development will weigh against the ratcheting up of trade tensions with China.
