As this space has mentioned before, the noises emanating from the floor of the Chicago Board of Trade while CNBC analyst Rick Santelli reports on the release of the ISM® Report On Business® can serve as an appropriate soundtrack for the financial world’s reaction to the just-unveiled data. The release of manufacturing report on Tuesday was no exception.
The commotion from the traders behind Santelli — as well as the various market graphics on the screen, many indicating a sudden, sharp downturn — summed up the sentiment after the September PMI® was 47.8 percent, indicating a second consecutive month of contraction and the lowest figure since June 2009, the last month of the Great Recession. The Dow Jones Industrial Average fell 300 points after the release, and concerns about a looming economic downturn were further fueled.
As a financial-planning firm executive and portfolio manager told The Wall Street Journal, “All of a sudden, we got the ISM data and it was below 50, and that whole narrative changed. Everything now seems to be orbiting around the manufacturing data, which unfortunately reinforced data we had coming out of Europe last week, specifically Germany, kind of pointing to this global slowdown scenario, at least from the manufacturing.”
Back in July, I identified the ISM's index of manufacturing activity as a key measure to watch for signs of a recession.— Ben Casselman (@bencasselman) October 1, 2019
Well it just fell unexpectedly to 47.8, its lowest reading since the end of 2016.https://t.co/LPeM8DkD9A pic.twitter.com/qwf3aFzGZi
In a conference call with reporters, Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® Manufacturing Business Survey Committee, was asked if the September data could be a harbinger of poor third-quarter data for the U.S. manufacturing sector. He said October is usually a strong month for factories — but so is September. “Without a rebound in September, I don't think October will rebound on its own. … The current position is that (manufacturing is) at a level that will continue,” Fiore said.
President Donald Trump blamed the Federal Reserve for the manufacturing slump, tweeting that interest rates should be lowered to combat a strong U.S. dollar. While Fiore said currency issues were a concern for Business Survey Committee respondents, trade and tariffs turbulence continues to dwarf all other factors. “There are quite a few comments on tariff activity in all factors: tariffs, counter-tariffs, and moving supply chains to be able export into other countries and import into the U.S.,” he said. “I think there needs to be some relaxation in trade to open (new export orders) up.”
Chris Rupkey/MUFG: ``Manufacturing has broken & is now in recession. It's official. The US trade war with the world has blown open a great big hole in manufacturers' confidence, & it will be a miracle if the broader economy can continue to roll on with manufacturing in decline.''
— Steve Matthews (@SteveMatthews12) September 3, 2019
The bellwether New Orders Index went up, but by only 0.1 percentage point. A bigger factor, Fiore said, is that three of the subindexes that support New Orders had discouraging readings: New Export Orders fell to 41 percent, its lowest number since March 2009; Customer’s Inventories (45.5 percent) remained in too-low territory; and Backlog Of Orders (45.1 percent) contracted for a sixth straight month. “There's plenty of capability to support demand,” Fiore said. “But demand is not showing up.”
Fiore said it’s too soon to draw comparisons to late 2015 and early 2016, when the PMI® spent five consecutive months in contraction territory, but a recession was avoided. Robert A. Dye, Ph.D., chief economist at Comerica Bank in Dallas, wrote in a note to clients that economic growth can continue “even with a cooling manufacturing sector. However, if a cooler manufacturing sector leads to an increase in layoffs, that would chip away at consumer spending, a key support to the overall U.S. economy.”
On that note, something to keep an eye on: The Employment Index fell to 46.3 percent, the lowest reading since January 2016. A Business Survey Committee respondent in plastics and rubber products wrote, “We have seen a reduction in sales orders and, therefore, a lower demand for products we order. We have also reduced our workforce by 10 percent.” Also, the walkout by union workers at General Motors has resulted in temporary layoffs by the automaker as well as some of its suppliers.
Fiore said the GM labor situation had minimal, if any, impact on the September PMI® data, but that could change with a lengthy dispute. Automakers are part of the transportation equipment industry, one of the six major sectors of the U.S. manufacturing. That sector is contracting, but at a slower rate compared to August.
The other major sectors are computer and electronic products; chemical products; food, beverage and tobacco products; fabricated metal products; and petroleum and coal products. They make up 70 percent of U.S. manufacturing gross domestic product, and just two are currently expanding, neither with much strength. “The big six industry sectors aren’t carrying the weight, and that's a big reason for the overall decline,” Fiore said.
Well ISM Mfg Index ruined the beautiful day.— Captain Rorschach (@capitanwhatafak) October 1, 2019
The Report On Business® roundup:
Associated Press: Weak Report on U.S. Manufacturing Knocks Stock Market Lower: “The ISM report showed that manufacturing contracted for the second straight month in September and hit the lowest level in more than a decade. It’s the latest sign that President Donald Trump’s trade wars are hitting the U.S. factory sector. Analysts had expected manufacturing to expand slightly.”
Bloomberg: U.S. Factory Gauge Hits 10-Year Low as World Slowdown Widens. “The second straight reading below 50 — the line separating expansion and contraction — extends the drop from a 14-year high just over a year earlier and raised concern about a recession even after two straight interest-rate cuts from the Federal Reserve. Slowing global growth has damped demand for manufactured goods at home and abroad while trade policy uncertainty has disturbed supply chains and put hiring plans on hold.”
.@ISM® Report On Business® survey respondent in chemical products: “Continued softening in the global automotive market. … Seeing warehouses filling again after what appeared to be a short reduction of demand.” https://t.co/qqaZb4XyxC #ISMROB #economy— Institute for Supply Management (@ism) October 1, 2019
CNBC: U.S. Manufacturing Survey Shows Worst Reading in a Decade. “The deeper contraction in the manufacturing sector is the latest sign that the escalated trade war between the U.S. and China is taking a big bite from the economy. Manufacturing was once considered a big winner under the Trump administration with improvement in employment and activity over the past few years.”
Investor’s Business Daily: ISM Manufacturing Index Falls To 10-Year Low As China Trade War Takes Toll. “As the group's production gauge slipped to a 10-year low, the employment measure dropped to the lowest since January 2016. That's a worrying sign before a jobs report Friday that's forecast to show private payroll growth remains subdued. Slowing global growth has damped demand for manufactured goods at home and abroad while trade policy uncertainty has disturbed supply chains and put hiring plans on hold.”
A gauge of US manufacturing showed worst reading in a decade in Sept., fanning recession fears:— Yun Li (@YunLi626) October 1, 2019
“We have now tariffed our way into a manufacturing recession in the US and globally."
“There is no end in sight to this slowdown, the recession risk is real."https://t.co/IoRXckb4s3 pic.twitter.com/hvrn6o4ENU
MarketWatch: U.S. Manufacturers Experience Worst Month Since 2007-09 Great Recession, ISM Finds. “Manufacturers at home and abroad have faced waning demand and more canceled orders as they struggle to cope with a global economic slowdown, exacerbated in part by the trade war between the world’s two largest economies. Manufacturing is a much smaller part of the economy than it used to be, but there are signs the industry’s slump is spreading to the larger service sector.”
Reuters: U.S. Factory Activity Sinks to 10-Year Low in September. “The index has now declined for a sixth consecutive month and is in stark contrast with a rebound in the so-called hard data like industrial production, which showed output at factories rising in August. Still, the ISM index needs to drop below the 42.9 level to signal a recession in the broader economy.”
US ISM new export orders. No comments needed. pic.twitter.com/DKEbwjiNx9— Frederik Ducrozet (@fwred) October 1, 2019
The Street: ISM Manufacturing Index Slumps to Decade Low as Trade War Hits U.S. Factories. “The U.S. factory activity slide followed a warning from the World Trade Organization on global commerce earlier Tuesday, with the international body cutting its global merchandise trade growth forecast to 1.2 percent from 2.6 percent for 2019. ‘The darkening outlook for trade is discouraging but not unexpected. Beyond their direct effects, trade conflicts heighten uncertainty, which is leading some businesses to delay the productivity-enhancing investments that are essential to raising living standards,’ said WTO director general Roberto Azevêdo. ‘Job creation may also be hampered as firms employ fewer workers to produce goods and services for export.’ ”
The Wall Street Journal: Slowing Trade Hits Global Manufacturing. “The tariffs imposed by the U.S. and China have reduced trade between the world’s two largest economies. According to economists at Barclays, U.S. imports from China were 12 percent lower in the first seven months of this year than in the same period of 2018, while Chinese imports from the U.S. were down 28 percent. Those declines haven’t been fully made up by increasing imports from other countries.”
Big miss on US manufacturing PMI at 47.8 - the fastest rate of contraction since mid-2009 & v weak new export orders. The US reading mirrors slowdown in global manufacturing but, for the growth outlook it'll be services sector data, later this week, which will give a better read pic.twitter.com/L6Zc4AdDRk— Simon French (@shjfrench) October 1, 2019
The Non-Manufacturing ISM® Report On Business® will be released on Thursday. For the most up-to-date content on the PMI® and NMI® reports, use #ISMROB on Twitter.