United States: ISM manufacturing index falls in September as order book growth softens
October 1, 2018
The U.S. manufacturing sector cooled somewhat in September but remained on a well above-average growth path. The Institute for Supply Management (ISM) manufacturing index fell from 61.3 in August to 59.8 in September, broadly matching analysts’ expectations of 59.9. The index remained comfortably above the 50-point threshold that separates expansion from contraction in the U.S. manufacturing sector, where it has been for 25 consecutive months.
The softer improvement in operating conditions in September was largely due to slowing new order growth, which nevertheless remained very strong. The sub-index for new export orders increased during the month, meaning that the deterioration came on the back of lower domestic orders. Meanwhile, output growth continued to inch up, indicating that the manufacturing sector kept on running near full capacity. Consequently, backlogs of orders grew at a slower pace, while employment growth accelerated slightly. Despite stronger output growth, customers’ inventories depleted slightly faster than in August.
Looking at supply-side indicators, supplier delivery times continued to lengthen, albeit at a more moderate pace than in August, while inventories grew at a slower pace as well. In addition, input cost inflation, while still very high, decreased notably—with the corresponding sub-index falling by more than five points. All together, these indices signal that pressure on manufacturers’ strained supply chains eased somewhat in the month.
Survey respondents continued to be overwhelmingly preoccupied with the impact of tariffs, heightening uncertainty relating to revenues and optimal manufacturing locations. One respondent noted that “the market is in a state of chaos with the latest round of tariffs, [which] have caused a mass rush to buy up inventories of affected products in order to minimize the long-term financial impact. This, in turn, is causing market constraints, which further drive up the cost and increase lead times”. Others added that tariffs were “starting to take a bite out of profitability” and “creating a drag on some of our export opportunities.”
Overall, momentum in the manufacturing sector is poised to remain strong in months to come, in good part thanks to the exceptional strength of the domestic economy which should continue in the current quarter and next. Nevertheless, firms will need to carefully balance high levels of activity with the coming trade war, slowing global growth, shortages of available workers, and transportation difficulties caused by an unprecedented shortage of truck drivers in the United States.
Author: Joffrey Simonet, Economist