US manufacturing slows as external factors outweigh domestic ones in September

The Institute for Supply Management (ISM) manufacturing index fell 0.9 points to 50.2 in September. The reading was below consensus expectations, which called for a lesser pullback to 50.6. Most subcomponents experienced declines, led by the backlog of orders (down 5.0 pts to 41.5), production (down 1.8 pts to 51.8), and new orders (down 1.6 pts to 50.1). Imports (down 1.0 pts to 50.5), prices paid (down 1.0 pts to 38.0) and employment (down 0.7 pts to 50.5) also pulled back somewhat on the month. The export index was unchanged, but remained in contractionary territory at 46.5. Inventories were unchanged at 48.5, while the customers inventory sub-index rose by 1.5pts to 54.5.

The spread between new orders and inventories - which tends to lead the headline index by about three months - narrowed to just 1.5. Eleven of the eighteen manufacturing industries are reporting contraction: Primary Metals; Apparel; Petroleum & Coal Products; Wood Products; Electrical Eqpt; Machinery; Electronics; Fabricated Metal Products; Plastics & Rubber Products; Transportation Equipment; and Chemical Products.

There is no doubt that this report is a disappointment, both in terms of the weak headline print, as well as the breadth of the weakness. The declines were widely felt across key sub-components with many showing little to no expansion whatsoever, and with a majority of industries reporting declines. Moreover, the small spread between new orders and inventories suggests that manufacturing will likely remain subdued through year end.

The subdued pace of activity in U.S. manufacturing sector stems from a trifecta of headwinds. The U.S. dollar is some 15% higher than it was a year ago both against advanced economy currencies, as well as those of emerging markets, making domestic products more expensive in foreign markets. This is happening amidst an already weak global demand backdrop and higher uncertainty stemming from worries around Chinese and other EM growth. Lastly, domestic factors, such as the ongoing decline in energy related investment, which hinders demand for fabricated metal and machinery, continues to weigh on producers of these products.