US September ISM didn’t drop below 50 but it might as well have

US September ISM didn't drop below 50 but it might as well have. The overall reading of 50.2 was a full point below August's and 3.5 points below June's - a third consecutive drop in as many months. Orders were notably flat at 50.1, employment equally so at 50.5. Inventories and back orders averaged 45, suggesting managers are bracing for a cold autumn. It wouldn't surprise given the hard data: actual industrial production has grown but 0.9% over the past year; manufacturing output is up by 1.3% YoY. 

Markets are betting on the service sector to provide 200k nonfarm payrolls growth in September (none in the mnfg sector). That makes qualitatively sense, given that services is the far bigger and relatively more stable sector. Moreover, the service sector ISM is, or at least was, still close to 60 in August and boasted a relatively beefy employment component of 56. The trouble is, the manufacturing sector remains the cyclical heart of the economy. Where it goes, the service sector eventually follows. With sentiment weak since July, 'eventually' might look more contemporaneous this time around. Time will tell.

Markets expect the official unemployment rate to remain at 5.1%. But payrolls growth of 180k or better (assuming they are mirrored in the household survey as well, from which the UE rate is calculated) should push the unemployment rate to 5% if labor force participation, currently at a 38-year low of 62.6%, remains stable or falls further. The underemployment (U6) rate continues to hover at 10.3% and it is a better indicator of underlying labor market slack and predictor of future inflation trends.