Another ugly manufacturing data

Macro

Christopher Dembik

Head of Macro Analysis

Summary:  The US ISM manufacturing big miss is a worrying signal for the economy, but the only data that really matters for Q3 GDP will be the upcoming non-manufacturing ISM on Thursday.


The latest manufacturing ISM for September is out. There is only one word coming to my mind to describe it: UGLY. The headline index did not rebound, as expected by the market, but it felt further into contraction, at 47.8, which is the lowest level since 2009. It is moving way below its long-term historical mean of 52.9. All the major sub-components are oriented south. New orders, production, imports, exports and employment are all contracting.

Given the figures released for August and September, US industrial recession is likely to materialize in coming months. It is the reflection of a very depressed global manufacturing outlook, but also of a sharp decrease of new exports orders due to the strength of the USD, and a big drop of Boeing’s deliveries.

That being said, it is obviously a worrying signal for the US economy, but it should not be overstated in its significance. It should be reminded to everyone that the ISM manufacturing is a coincident indicator and it does not track so well GDP growth.

The only data that really matters for Q3 GDP will be the non-manufacturing ISM on Thursday. As household consumption represents about 70% of the US economy, it is clearly a much better gauge to assess the real state of economic activity. It will also provide a first answer to one of the most important questions that clients and traders are asking: Is manufacturing weakness spilling over into services? If the answer is yes, then consider a 25bps rate cut is a done deal in December, and at least another rate cut is highly likely in Q1 2020. In this context, it would be extremely complicated for the Fed to keep talking about “insurance cut”.

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