The Manufacturing ISM® Report On Business® data for September suggests that the Federal Reserve’s interest rate hikes designed to cool the economy and tap the brake pedal on inflation are having, at least for U.S. factory activity, the desired effect.
The Manufacturing PMI® of 50.9 percent, unveiled on Monday, was the lowest since May 2020, but again, the subindex data was just as compelling, if not more so, than the composite number. The Prices Index fell for the sixth straight month — tumbling from 87.1 percent in March to 51.7 percent in September — though the trade-off appears to be cooling demand and, for the first time in a while, less-than-eager hiring.
ECONOMY WATCH: U.S. factories slow again in September, ISM index shows. Manufacturing PMI falls to 50.9% from 52.8% – lowest since May 2020 as pandemic raged. More evidence economy decelerating due to inflation and rising interest rates. Companies hiring less as new orders fall.— Jeffry Bartash (@jbartash) October 3, 2022
That combination has brought some turbulence to a sector that in August appeared on a “good glide path,” as Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® Manufacturing Business Survey Committee, indicated then. But in a conference call of reporters on Monday, he said, “Last month, we felt we were getting close to (supply and demand) equilibrium, but this month felt a little off-balance. Demand has weakened.”
The New Orders Index (47.1 percent) contracted for the third time in four months, and the New Export Orders Index (47.8 percent) did so for the second month in a row. The Employment Index returned to contraction territory at 48.7 percent, but the Business Survey Committee respondents’ comments were more telling: There was no evidence of mass layoffs, but hiring managers were in no rush to fill open positions — a shift in sentiment from the all-points bulletin for qualified candidates at most companies during the last two years.
Fiore said that about a third of respondents indicated their companies had instituted a hiring freeze, confident that their current head counts are sufficient for future order levels. Decreased demand and fewer, or at least stagnant, numbers of employees on factory floors typically does not bode well for the Production Index, which in September was up 0.2 percentage points to barely stay in expansion territory, at 50.6 percent. The Inventories Index (55.5 percent) is likely an indication of companies over-ordering materials, Fiore said, and also figures to come down.
Market loving some bad news, ISM's Sept. manufacturing reading falls to lowest level since May 2020 so the #DOW +571 on hopes the Fed will take a more dovish view of rates as the economy slows. Good luck with that.— Jason Brooks (@brookskcbsradio) October 3, 2022
And what could those trends mean for the composite PMI® — which is calculated from the New Orders, Production, Employment, Supplier Deliveries and Inventories indexes — in the coming months? “I don’t see the Production Index coming on that much, maybe 52 (percent), and Employment could stay negative for a while,” Fiore said. “If the Inventories number comes down, the probability of the PMI® staying above 50 in the next two or three months is a lot lower than it was (in August).”
Fiore reiterated that U.S. economic recessions have coincided with New Orders Index readings in the low-40s, and right now, there is no threat of that. But the current manufacturing expansion, in its 28th month, will need steam to reach the average cycle of 35 months. “(The sector) tends to lead the economy, and it’s clearly showing signs of a slowdown,” he said.
Continuing a “bad news is good news” mindset, markets rallied in the hours after the release of the Manufacturing PMI® data, hopeful that the slowing factory activity could soften the Fed’s pursuit of additional interest rate increases. Recent history suggests that’s wishful thinking, which means there could be many more miles on the suddenly sobering flight path taken by the U.S. manufacturing sector.
“The October numbers will be interesting,” Fiore said.
The Report On Business® roundup:
Bloomberg: U.S. Manufacturing Downshifts as Orders Shrink, ISM Data Show. “In addition to the falloff in orders, the ISM’s composite gauge was driven down by declines in gauges of factory employment and supplier deliveries. The weakening in employment, which showed contraction for the fourth time in five months, may be the combined result of still-tight labor markets and the moderation in demand.”
CNBC: September ISM Manufacturing Data Comes in at 50.9, Lightest Since May 2020. “ISM Manufacturing, these are September numbers, expecting 52.0 percent on the headline, it’s 50.9. That is the lightest since May 2020,” analyst Rick Santelli said. “Prices paid, 51.7 percent, roughly in line with expectations, sequentially lower. … New orders at 47.1 percent — (below) 50, which isn’t good. Last time under this level, we have to go back to 2020 as well, and finally, ISM employment, 48.7 percent. And remember this week, we get the (federal) employment figure. … So, we do see a deterioration in all ISM (indexes).”
DailyFX: S&P 500 and Nasdaq 100 Extend Gains Despite Weak ISM Manufacturing Data. “While the weak report does not bode well for the economy, traders are betting that the sharp slowdown may induce the Fed to adopt a less aggressive hiking bias, a scenario that could prevent a more substantial economic downshift in the future. In this context, bad data may be good news for stocks in the coming days.”
After months of resilience, the ISM Manufacturing Index fell to 50.9 in September, below the estimate of 52.— jeroen blokland (@jsblokland) October 3, 2022
In addition, the ISM New Orders fell to 47.1, which is not far from #recession levels.
The Employment index fell to 48.7, against 53.0 expected. Powell happy? pic.twitter.com/MWhaWG4Mwf
Mace News: ISM Manufacturing Survey Shows Signs of Slowdown; New Orders, Jobs Down. “On the upside, Fiore noted that month-over-month supplier delivery performance was the best since December 2019 … and lead times continue to ease for capital equipment and production materials. The Supplier Deliveries Index ‘reached an appropriate tension level,’ posting the fifth straight drop, down 2.7 (percentage) points at 52.4 percent in September after slipping 0.1 point to 55.1 in August.”
MarketWatch: ‘We Don’t Need as Many Employees’: Factories Slow as Rising Interest Rates Rattle the Economy. “The slowdown in the economy, however, is starting to ease price pressures as the U.S. battles the highest inflation in 40 years. The prices businesses pay for supplies sank for the sixth month in a row and touched the lowest level in more than two years. The ISM report is viewed as a window into the health of the U.S. economy. Economists polled by The Wall Street Journal had forecast the index to drop to 52 percent.”
Manufacturers remained challenged by supply chains, worker shortages, soaring costs and economic & geopolitical uncertainties. Yet, the sample comments revealed a surprising strength in demand in some sectors, which is notable given the slower global economy and other challenges.— Chad Moutray (@chadmoutray) October 3, 2022
Reuters: U.S. Manufacturing Activity Slowest in Almost 2½ Years in September. “Some of the (slowdown) reflects the rotation of spending from goods to services. Government data last Friday showed spending on long-lasting manufactured goods barely rising in August, while outlays on services picked up. ... (H)igher borrowing costs are undercutting spending on big-ticket items like household appliances and furniture, (which) are typically bought on credit.”
The Wall Street Journal: Economic Turmoil Separates Manufacturing’s Haves and Have Nots. Manufacturers’ recovery from the plunge they experienced early in the pandemic has been remarkable. The support many households received from the government — plus the shift in consumer appetites toward goods — provided them with ample demand, and output quickly bounced back. … But over the past several weeks the environment for manufacturers has gone from challenging to awful.”
ISM’s Services PMI® will be unveiled on Wednesday, and the Hospital PMI® on Friday. For the most up-to-date content on the reports under the ISM® Report On Business® umbrella, use #ISMPMI on Twitter.