In the U.S., the ISM manufacturing index unexpectedly fell to 47.8 in September, the lowest since June 2009. Consensus was expecting an increase to 50. All major sub-indices, namely production, new orders and employment were in contraction territory in September, i.e. below 50. Separately, construction spending rose 0.1% in August, also disappointing consensus which was expecting a 0.5% advance. While residential construction rose 0.9%, that was offset by a 0.4% drop in the non-residential sector.
The last time the ISM manufacturing sank that low, outside of a recession, was in 2003. The surprising decline in the ISM in September will re-energize bears who have been calling for more aggressive interest rate cuts from the Federal Reserve. Should the Fed cave in to those demands based on one data point? For starters, it’s not even clear that U.S. manufacturing is in recession considering another survey, Markit’s purchasing managers index, suggested just this morning that manufacturing activity was the best in five months in September! It’s possible September’s ISM index was negatively impacted by the strike at General Motors, a temporary event. But even assuming manufacturing is hurting, which isn’t a stretch given damages caused by the ongoing trade war, that would not necessarily mean the U.S. economy as a whole is in recession. The ISM makes clear in its report that an index above 42.9 “generally indicates an expansion of the overall economy”. All told, while manufacturing woes and the apparent moderation in construction spending are not good news, they do not preclude continued expansion of real U.S. GDP in Q3.