U.S. factory activity in September contracted for the second consecutive month to reach its lowest level since June 2009—the end of the last recession. The Institute for Supply Management’s leading manufacturing index, the PMI, registered 47.8 in September, a 1.3 percent drop from August. The demarcation line between expansion and contraction is 50.
Business confidence is eroding, according to the ISM, as trade issues continue to dog U.S. manufacturers. “One-third of our comments this month were tariff-related,” said Tim Fiore, chair of the ISM’s manufacturing survey committee, “and that’s only going to get worse. New tariffs are scheduled for Oct. 15 and Dec. 15. The possibility of a resolution [with China] is being diminished every day.”
The ISM polls thousands of U.S. manufacturers every month for its Report on Business. Only three of the 18 manufacturing sectors surveyed by the ISM expanded in September.
Electronics—one for the four largest segments tracked by the ISM -- is also in contraction mode, said Fiore. New orders contracted strongly, he said, and employment levels fell. September was the second consecutive month that computer and electronics shipments outpaced new orders, a tech executive told the ISM. Two other big sectors, chemicals and transportation, are stabilizing, Fiore said.
Overall, September’s PMI was driven by negative numbers. Production declined by 2.2 percent to 47.3; employment decreased 1.1 percent to 46.3; suppliers’ deliveries registered 51.1 percent, a 0.3-percentage point decrease from August. Inventories registered 46.9 percent, a decrease of 3 percentage points from the August reading of 49.9 percent. September’s contraction extended six straight months of softening in manufacturing.
“I think there’s no demand,” said Fiore. “New orders have dried up – this month was worse than August; new export orders dropped to 41, which is also down from last month. Customer inventories grew which makes them ‘about right;’ but that means future production will be negatively impacted. Backlog also contracted. That’s three big sub-indexes in negative territory.”
More importantly, said Fiore, the conversation around employment has moved from “can’t find qualified workers” to “forced reduction and attrition.” As the third calendar quarter closes, managers are focused on three cost centers: plants and equipment, labor and raw materials. “Plants and equipment, you can’t do much about,” Fiore explained. “Raw materials, you can choke those off. And then you look at headcount. Companies are planning for 2020 and there is no relief in sight.”
September’s rate of contraction accelerated from August, which surprised analysts and the ISM. “The manufacturing sector is generally strong,” said Fiore, “and I was expecting new orders and production to move up.” Analysts polled by Reuters had predicted a PMI of 50.1 for September; Bloomberg had also forecast an increase.
Consumption, which is measured by the production and employment indexes, contracted at faster rates, primarily driven by a lack of demand, contributing negative numbers (a combined 3.3-percentage point decrease) to the PMI calculation, Fiore explained. Inputs — expressed as supplier deliveries, inventories and imports — were again lower in September, due to inventory tightening for the fourth straight month. This resulted in a combined 3.3-percentage point decline in supplier deliveries and inventories. Overall, inputs indicate that supply chains are meeting demand and companies are continuing to closely match inventories to new orders. Prices decreased for the fourth consecutive month, but at a slower rate.
“Oil prices were stable—they haven’t spiked globally—and overall U.S. manufacturers’ prices are near stability,” Fiore said. “That’s one good thing that came out of the September report.”
The impact of the General Motors strike was not reflected in September, but if the work stoppage continues it will show up in October. “Overall, sentiment this month remains cautious regarding near-term growth,” Fiore concluded.
Historically, a contraction in the PMI has preceded a recession. The ISM was founded in 1915 as the first supply management institute in the world. Its reports on business have been issued monthly since 1931, except for a four-year interruption during World War II.