September ISM Drops to 47.8

We got a shocking report this morning. The ISM Manufacturing Index dropped to 47.8 for September. That’s the lowest in more than 10 years.

This is important for a few reasons. One is that the ISM report is one of the fastest reports we see. It typically comes out in the first business day of the month and it covers the previous month.

Compare that to last weeks’s GDP report which covers the period that began six months ago and ended three months ago.

The second straight reading below 50, the line separating expansion and contraction, extends the drop from a 14-year high just over a year earlier and may add to calls for the Federal Reserve to cut interest rates further. Slowing global growth has damped demand for manufactured goods at home and abroad while trade policy uncertainty has disturbed supply chains and put hiring plans on hold.

The group said just three of 18 industries reported growth in September, the lowest total since April 2009. Contracting industries were led by apparel, leather and allied products; printing and related support activities; and wood products. The only expansions were in miscellaneous manufacturing; food, beverage and tobacco products; and chemical products.

ISM’s measure of new orders, considered a leading indicator of downturns, edged up slightly to 47.3 from an August reading that matched the weakest of this expansion. The production index declined to 47.3, while the inventories gauge fell to 46.9, the lowest since late 2016.

The ISM report also has a decent track record of lining up with recessions. Generally, recessions happen when the ISM drops below 45. While any reading under 50 means the factory sector is contracting, the real pain starts around 45.

A few caveats. One is that it just covers manufacturing. The rest of the economy may be doing fine. For August, personal consumption rose by just 0.1%, but we don’t have the numbers for September just yet.

Also, the economy has had periods of strong growth with soggy ISMs. The 1990s is a good example.

Posted by on October 1st, 2019 at 10:56 am


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