September’s ISM reading of 51.5% was up from 49.4% in August and in line with the anticipated 51.4%. Importantly, the production and new orders indices were up solidly, at 52.8% and 55.1%, respectively. Unfortunately, the employment index remained below 50% for a third consecutive month, following a brief blip above in June. Comments from respondents were fairly mixed, from moderately optimistic to a continuation of soft demand.
Bottom line: September’s ISM was helpfully back above the 50% mark following a dip below in August. Despite the manufacturing sector having become a smaller share of the economy, this index is still quite useful and can be a good leading indicator for aggregate economic activity. The employment index still below 50 is discouraging and continues to reflect the weakened state of this sector. On the more optimistic side was the behaviour of the new orders and production indices, which are both good forward-looking indicators, and this should help factory orders moving forward. Overall, we continue to believe that any improvement in aggregate manufacturing activity is still likely to be slow and grinding, and the impact from the stronger dollar is still being felt. And despite the sharp inventory draw-down in the second quarter, inventory-to-sales ratios are still far too high, and there is plenty of excess production taking place globally, in addition to demand from China and the rest of the world remaining soft. Lastly, this report suggests that the August slowdown in just about all areas of the economy may have been confined to that month and activity may have been a little rosier in September.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.