US Manufacturing ISM Purchasing Managers’ Index Preview: Too soon to cheer

• Factory sentiment expected to rebound after one month in contraction
• Business spending remains weak as China trade dispute drags on
• Consumer spending continues to carry the economy

The Institute for Supply Management (ISM) will issue its purchasing managers’ index (PMI) for the manufacturing sector in September on Tuesday October1st at 14:00 GMT, 10:00 EDT.

Forecast

The purchasing managers’ index is expected to rise to 50.0 in September after slipping to 49.1 in August and 51.2 in July. The prices paid index is predicted to rise to 49.3 from 46.0.  The employment index was 47.4 in August and 51.7 in July.  The new orders index was 47.2 in August and 50.8 in July.

ISM Manufacturing Report on Business

The ISM survey is based on the responses of “a group made up of more than 300 purchasing and supply executives from across the country.” These professionals respond anonymously to a “monthly questionnaire about changes in production, new orders, new export orders, imports, employment, inventories, prices, lead times, and the timeliness of supplier deliveries in their companies comparing the current month to the previous month.” The answers are tabulated into an index and rated on a scale that places the division between expansion and contraction at 50 with the first above and the latter below.  *Quotations from the Institute for Supply Management website.

US and China and manufacturing: no one is happy

The manufacturing sectors in US and China have paid the heaviest price for the inability of the two countries to put their obvious mutual interests into a treaty.  

The US purchasing managers’ index for manufacturing has been falling for 12 months. It reached a 15 year top at 60.8 in August 2018. By March of this year it was 55.3 and in August it dropped to 49.1, the first time it has been below 50 since August 2016 and lowest it has been since that January.

Reuters

The indexes for employment and new orders have dropped along with the overall rating. New orders, the gauge of future business, have fallen from 67.3 in December 2017 and 64.5 in August 2018 to 60.0 this past June and 47.2 in August. That is the lowest this measure has been since an equal score in June 2012.

Employment declined gently from 59.5 in October 2017 to 57.5 in March of this year. Since then the drop has accelerated 54.5 in June, 51.7 in July and 47.4 in August.  It is now at the lowest in two and a half years.

In China the latest manufacturing PMI from the government’s National Bureau of Statistics was 49.8 in September. The gauge has been below the 50 division for five months and eight of the last ten.

Reuters

Though the US factory sector is probably in better shape than that of its Pacific competitor due to its much larger domestic market and far lower dependence on exports, neither is capable of a sustained recovery without an agreement. Businesses will not invest in capital projects and expansion until they are certain that an escalation of the trade war will not plunge the global economy into recession.

The US consumer and GDP

Consumer spending has been healthy for the past six months backed by the still expanding labor market and some of the best wages gains in a decade. The six months to August were the strongest for retail sales in 16 years.

Reuters

Consumption is the backbone of US economic growth at about 70% of the total. That activity has kept the economy chugging along as business spending has tailed off. From 3.1% in the first quarter to 2.0% in the second and an estimated 2.1% in the third from the Atlanta Fed, the US has been growing at about the pace commensurate with the rate of consumer spending.

Consumer sentiment

The trade dispute with China was inaugurated by the US in January 2018 and for the majority of that time US consumers have been little affected.

That may have begun to change in August and September. Both major surveys of consumer attitudes, the Michigan Survey of Consumer Sentiment and the Conference Board Consumer Confidence Index have fallen sharply. The Michigan from 98.4 in July to 89.8 in August and 93.2 in September. The Conference Board from 134.2. In August to 125.2 in September.

Reuters

There are other possible explanations for the shift in consumer outlook than the sudden realization that the trade war may be as far from a comprehensive settlement as ever.  Perhaps the increasingly bitter political warfare in DC that goes with the oncoming presidential election is as distasteful as it has always been to the majority of Americans. 

But whatever the cause consumers have been the mainstay of US economic growth this year. If they become discouraged then the prospects for the world’s largest economy  dim considerably.