The Institute for Supply Management (ISM) has issued two reports this week and both of them have pointed to slowing economic activity here in the United States. The ISM Manufacturing Index came out on Tuesday and the ISM Non-Manufacturing Index came out on Thursday.
The manufacturing index dropped to 47.8 in September and that is the lowest reading since June 2009. It is the second straight reading below the 50 level and that is a critical point as the 50 level is the demarcation point between expansion and contraction. I pointed out in an article earlier in the week that the export portion of the report fell sharply. But if we break the report down component by component, it does not look good for the economy.
The table below from Briefing.com shows how each component has changed over the last few months. Orders were and deliveries were relatively flat, but there were big declines in production, employment, and inventories (in addition to the exports). We also see a big jump in the prices paid in September compared to August.
The employment portion is a concern with the reading being so low and that gives me concern for the impending September employment report which is due out on Friday, October 4. The biggest changes in the components since May have been in export orders and employment.
The Non-Manufacturing Index came out on Thursday and the reading was 52.6. That reading was below the consensus estimate of 55.4 and it was below the August reading of 56.4. It is also the lowest reading since August 2016.
Breaking down the different components for this report just as we did the manufacturing index, we see the two lowest readings are in imports and employment. The biggest changes since May have come in the employment component and the business activity component.
Unlike the manufacturing index, where almost all of the components are below the 50 level, the only component below 50 on the non-manufacturing index is the imports component.
Turning our attention to the upcoming September employment report, the consensus estimate is for job growth of 130,000 during the month. That is the lowest estimate in seven years with the exception of months where there were natural disasters (2017, Hurricanes Harvey and Irma) or government shutdowns (2013).
This time the consensus estimate is low because of the ongoing trade war and the slowdown in manufacturing. With the estimate being so low, I really don’t know how the market would react if the report were to come up short.
In recent months, if the payroll numbers came up short, the market seemed to rally more times than not because investors viewed the bad news as a good sign. They saw the disappointing numbers as a sign that the Fed would be forced to cut rates. Now the Fed has cut rates twice and seems to be in a holding pattern for now, but a weak employment report could force another cut at the meeting at the end of the month.
Even if the report does disappoint and force the Fed to cut, I’m not sure it will be viewed as good news this time around. Other countries around the world are also seeing slowdowns in manufacturing and that has had a big impact on the global equity markets. Stocks fell sharply after the ISM Manufacturing Index and they were down big again on Wednesday when reports from Europe showed contraction in manufacturing.
Another aspect of the two ISM reports that concerns me is the prices paid component of each. In both cases, the prices paid jumped significantly in September and they have increased for two consecutive months. This could be a sign of building inflation and that could keep the Fed from cutting if they think inflation is starting to creep up.
One thing is for certain, the market is likely to see heightened levels of volatility for the coming weeks with the economic reports, Fed meetings, and earnings season starting soon.