The first of this week’s top-tier US data came in short of consensus, which was either bad news or good news, depending on your lens.
If you’re the type who’s desperate for a Fed pivot, you’re pleased with incremental evidence of a decelerating economy. If, on the other hand, you’re concerned that the rate hikes the Fed has already delivered are likely to manifest on a lag, pushing the economy into a deep recession, then the same incremental evidence might be seen as foreboding.
Whatever the case, ISM manufacturing printed 50.9 for September, below the 52 economists expected. It was the lowest print since May of 2020 (figure below).
The range of estimates, from more than five-dozen forecasters, was 50 to 53.6.
Notably, September’s print took ISM’s gauge below the S&P Global survey, which was revised slightly higher (to 52 from 51.8) in the final reading for September.
ISM new orders dropped markedly, to a 28-month low, while inventories rose to 55.5. That ballooned the spread again, which bodes ill for the headline gauge. Ostensibly anyway (figure below).
By contrast, new orders in the S&P survey rose to a four-month high. Choose your own adventure. The juxtaposition between these two surveys is impossible to reconcile on most months, although brighter minds than mine will tell you it’s explainable by reference to how the gauges are constructed.
“The US manufacturing sector continues to expand, but at the lowest rate since the pandemic recovery began,” ISM’s Tim Fiore said Monday. “Following four straight months of panelists’ companies reporting softening new orders rates, the September index reading reflects companies adjusting to potential future lower demand.”
That’s probably music to the Fed’s ears, although they wouldn’t put it that way. Monetary policy is now actively pursuing demand destruction in an effort to douse inflation.
Speaking of price growth, the prices paid index in the ISM survey dropped a sixth month, to 51.7, the lowest since June of 2020 (figure below).
That’s welcome news and continues to suggest input cost inflation is abating.
A pair of anecdotes from ISM respondents underscored the notion that the economy is at a crossroads of sorts — caught between the legacy of the pandemic and a burgeoning slowdown. “Supply chain issues for all electronic components and custom build-to-print materials are in short supply due to capacity and skilled labor shortages [while] energy costs continue to negatively impact freight costs,” someone in Computer & Electronic Products remarked. Meanwhile, a respondent in Chemical Products flagged “growing concerns of [a] global economic slowdown” which are prompting “some customers [to] pull back orders.”
Commenting Monday for the final vintage of the S&P Global survey, Chief Economist Chris Williamson was constructive, but cautious. “With US manufacturers reporting a return to growth of order books for the first time in four months, as well as improved job gains, the September survey brings welcome news that business conditions are starting to improve again,” he wrote. “However, even with the latest improvement, the weakness of the data in recent months still point to manufacturing acting as a drag on the economy in the third quarter, and demand will need to revive further if any meaningful positive contribution to GDP is going to be seen in the rest of the year.”
If you’re long risk assets, you’re probably hoping conditions continue to deteriorate. But not too much. Rather, just enough to make the Fed reconsider before the list of broken “stuff” includes the US economy.
You gotta think the FOMC is on the fence about whether to go with a fourth straight 75bps hike at its next meeting in November, or back off a bit and go with 50bps instead. As has been noted many times by H., days like this in the markets are counter-productive for any investor hoping for fifty.