US DATA: Slight, Uneven Improvement In Manufacturing ISM Amid Soft Demand
September's ISM Manufacturing Report showed a slight if uneven improvement in sectoral activity, with the headline index improving as expected but sub-categories coming in mixed. This is indicative of a manufacturing sector contracting, albeit at a slightly slower rate - though as the ISM report reminds, this doesn't mean that the broader economy is contracting (a manufacturing above 42.3 "over a period of time, generally indicates an expansion of the overall economy.")
- The headline PMI of 49.1 edged expectations of an improvement to 49.0 (48.7 prior), and marked a 7-month high.
- New orders fell back into contraction for the 7th month in 8 at 48.9 (50.0 expected, 51.4 prior). Employment picked up more than expected, however, to a 4-month high 45.3 (44.3 expected, 43.8 prior). And Production rose 3.2 points to 51.0, while Backlog of Orders rose 1.5 to 46.2.
- The sequence here is described by the ISM: the prior "increase in new orders (an index gain of 4.3 percentage points from July to August) seems to have flowed through to production but does not appear to be sustainable given the subsequent drop in new orders in September." That said, new orders still slightly exceed inventories (47.7), which historically has been suggestive that future production is in the pipeline.
- New Export Orders fell 4.6 points to 43.0, for a 7th consecutive contraction, with imports down 1.3 points to 44.7. Both were 4-month lows.
- Even so, the two "output" (Production and Employment) indices improved. But just 1 of 4 "demand" indicators (Backlog of Orders) improved, vs faster contractions in New Orders, New Export Orders, and Customers' Inventories. And "inputs" (supplier deliveries, inventories, prices, imports) on total moved into contractionary territory (supplier deliveries slowed, which contributes to a higher ISM index).
- On that note, though, Prices Paid fell more than anticipated, to an 8-month low 61.9 (62.7 expected, 63.7 prior), suggesting that largely tariff-related inflationary pressures peaked this summer but remain at an elevated rate.
- More broadly, the anecdotes were overwhelmingly negative, with several complaints about tariff and interest rate policy, as well as citing weaker demand.
- On the Employment front, the weaker headline reading came with some color suggestive of a low-hiring, low-firing environment: "64 percent of panelists’ comments still indicated that managing head count is still the norm at their companies, as opposed to hiring...Of the six big manufacturing sectors, none reported higher levels of employment in September. For every comment on hiring, there were three on reducing head counts as companies continued to focus on accelerating staff reductions due to uncertain near- to mid-term demand."
- On New Orders, “Of the six largest manufacturing sectors, none reported increased new orders. For every positive comment about new orders, there were 1.6 comments expressing concern about near-term demand, primarily driven by tariff costs and uncertainty."
- On Prices Paid: "The Prices Index reading continues to be driven by increases in steel and aluminum prices that impact the entire value chain, as well as tariffs applied to many imported goods."
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