- The Institute for Supply Management’s (ISM) Non-Manufacturing Index posted a significant decline in September, falling 3.8 points to 52.6 in September from 56.4 in August. This marks the lowest level since August 2016. The headline print was considerably below of consensus expectations, which called for a smaller decline to 55.0.
- Of the index’s four key subcomponents, three declined on the month. Delving into details, both business activity (-6.3 to 55.2) and new orders (-6.6 to 53.7) posted large declines, partially reversing outsized gains in the month prior. The employment subcomponent also dropped by 2.7 points to 50.4 (from 53.1), narrowly avoiding slipping into contractionary territory. This marks the lowest level since February 2014. The supplier deliveries index was the only key subcomponent to post an uptick in September (+0.5 to 51.0).
- One piece of good news was the increase in backlog orders, which gained 5.0 points rising to 54.0 from 49.0.
- Price pressures intensified for the second consecutive month in August, with the prices paid subcomponent rising to 60.0 (from 58.2).
- Trade-related components were mixed. Import orders fell 1.5 points to 49.0, slipping into contractionary territory, meanwhile, export orders strengthened by 1.5 points to 52.0.
- The expansion was also less broad-based than before, with only 13 out of 18 industries reporting growth in September.
Key Implications
- Well, when it rains it pours. The ISM Non-Manufacturing Index disappointed expectations with larger-than-expected drop in September. Unlike its manufacturing counterpart, the non-manufacturing measure remains above the critical 50-points threshold that separates expansion from contraction. However, the cushion is getting thin, suggesting that the manufacturing slowdown and the drag from tariffs are spilling over to the services sector and the broader economy.
- Non-manufacturing industries represent nearly 90% of the U.S. economy, and have avoided a deeper slump thanks to the resiliency of American consumers. However, the next few months will be a test of the U.S. consumers’ confidence in the face of recession-talk headlines, the next round of tariffs impacting consumer goods, financial market volatility and the latest political uncertainty in Washington. Moreover, job growth was already slowing in recent months, and the fact that the employment subcomponent has slipped into contractionary territory in September does not instill confidence in the labor market.
- Comments from survey respondents were awash with worries about tariffs and rising costs, suggesting businesses are concerned about their bottom lines. Rising costs will likely be increasingly passed on to consumers, which will further weigh on demand. All in all, while the U.S. economy continues to hum along, today’s data suggests that the slowdown is broadening, and will likely necessitate at least one more rate cut by the Fed. Tomorrow’s employment data for September will be very closely watched to see how hiring held up in September in the face of broadening economic uncertainty.
