The US manufacturing sector continued to experience contraction in September, reflecting weak demand and declining employment metrics. According to the Institute for Supply Management (ISM) and S&P Global data, the ISM's purchasing managers' index remained at 47.2, consistent with the previous month but falling short of market expectations, which anticipated a 47.5 reading.
This index is critical as readings below 50 indicate general contraction within the sector, and over the past year, the average has been 48. Timothy Fiore, chair of the ISM's manufacturing business survey committee, elaborated on the current challenges, stating, "Demand remains subdued, as companies exhibited reluctance to invest in capital and inventory, influenced evidently by federal monetary policies—issues which the US Federal Reserve acknowledged at the time of this report—coupled with uncertainty surrounding the upcoming election." In terms of employment, the employment index showed deterioration, slipping to 43.9 from 46 on a monthly basis, which signals that employment reductions are happening at a faster pace than in August.
Fiore noted, "Panelists mentioned ongoing efforts within their companies to adjust workforces to align with projected demand." Among the 18 manufacturing industries tracked by ISM, 11 reported reductions in employment this month. Furthermore, the ISM index that gauges new orders indicated an improvement, rising to 46.1 from 44.6 last month, while production saw a gain of five points, reaching 49.8.
Interestingly, the prices paid index declined to 48.3 in September from 54 in August, marking its first entry into contraction territory this year as indicated in the ISM report. Despite the seemingly bleak outlook presented by the report, some experts see potential for optimism. TD Economics Senior Economist Andrew Hencic remarked, "While the report paints a challenging picture for the sector, there are some reasons for optimism.
The prices paid index has indicated declining raw materials prices for the first time since late last year. Coupled with the Fed's initiation of a rate-cutting cycle, there are glimmers of hope for a sector beleaguered by higher interest rates." In a separate analysis, S&P Global noted that its manufacturing PMI fell to 47.3 in September from 47.9 in August, deviating from the Bloomberg consensus of 47.
Orders faced a significant decline month-over-month, while employment fell at the most accelerated rate since early 2010, excluding the anomalies introduced by COVID-19. Chris Williamson, chief business economist at S&P Global Market Intelligence, observed, "Companies perceive that at least part of the demand drop may be temporary, as spending, investment, and inventory accumulation have been largely paused due to uncertainty stemming from the presidential election.
The expectation of reduced interest rates, however, has started to bolster confidence in the long-term outlook, with firms believing demand will be reinvigorated by lower borrowing costs if the political climate improves.".