The Institute of Supply Management’s Purchasing Manager Index for the US manufacturing sector fell to 47.2 on Friday, the lowest reading since June 2009, at which time the US economy had already fallen into one of its deepest recessions since the 1930s. The reading marks the fifth straight month in which ISM manufacturing PMI has been below 50, implying a fifth straight monthly decline in manufacturing activity.
Its sub-components provide little by way of relief. The employment component fell to 45.1, boding poorly for next week’s NFP release, while the more forward-looking new orders component fell to 46.8. Along with the headline, both components are at cyclical lows.
Manufacturing prices rose to 51.7 from 47.5, providing some evidence of rising inflation in the sector, although that will hardly bring much cheer; rising inflation despite weakening growth theoretically creates a headache for central bankers, who may want to loosen policy to support growth but have their hands tied by rising inflation.
Regardless, all other evidence suggests that inflation continues to be muted across the US economy (and has been used as a key justification by the Fed for its recent rate cuts), so this reading is likely to be taken with a pinch of salt. More likely, it might serve as further evidence of the effect of tariffs on Chinese imports, which have steadily increased throughout the year until only very recently. Typically, higher tariffs = higher prices. Again, this type of “cost-push” inflation creates headaches for monetary policymakers and is exactly what the Fed does not want to see.
So how bad are things actually getting then?
Senior Economists at Wells Fargo Tim Quinlan and Sarah House argue that today’s ISM may not be as awful as it looks.
“An argument could be made that the ISM has offered a glass-half-empty look at the industrial sector in recent months” they comment. They acknowledge that a number of other purchasing manager surveys have indicated a softening but point out how the ISM looks “decidedly” worse than others.
Indeed, since late 2018, both the Markit Manufacturing PMI index and the ISM weighted index of the regional New York, Philadelphia, Dallas and Kansas City Fed PMI have also been on the decline, but neither has fallen to levels that indicate a contraction in the manufacturing sector. Markit’s Manufacturing PMI index has actually shown tentative signs of recovery in recent months.
Where is US manufacturing headed next?
When plotted against each other, a strong inverse correlation between rising tariffs levels and the falling ISM manufacturing PMI can be seen. So does that mean that if the US and China have reached a Phase 1 trade deal and tariffs are now to be slowly unwound, then ISM manufacturing will steadily recover from here?
Quinlan & House remind us that a major concern for the manufacturing sector is the current suspension on Boeing’s production of 737 Max aircraft. It is worth noting that much of the decline seen across various manufacturing PMIs have come since the suspension of 737 Max aircraft deliveries in March 2019. “With production scheduled to halt this month, we have removed the 126 737 MAX jets that would have been produced in Q1 from our forecast and that alone will pull industrial production into negative territory in Q1” they say, before concluding that “the longer it goes, the worse it is for industrial output.”
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