Manufacturing output dips for second straight month, reports ISM

On the heels of a 35-month run of growth, September was more of the same, according to the most recent edition of the Institute for Supply Management's (ISM) Manufacturing Report on Business, which was released today.

The report's key metric, the PMI, declined 1.3% to 47.8 (a reading of 50 or higher indicates growth), following a 2.1% decline from July to August, as well as a 0.5% decrease in July and 0.4%, 0.7%, and 2.7% declines in June, May, and April, respectively. Despite the PMI being in contraction territory, the overall economy grew in September for the 125th consecutive month. The September 2019 PMI is 5.7% below the 12-month average of 53.5 and is the lowest reading during that span and is the lowest PMI reading going back to June 2009 , when it came it at 46.3.

ISM reported that three of the 18 manufacturing sectors it tracks saw growth in September, including: Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; and Chemical Products. The 15 industries reporting contraction in September — in the following order — are: Apparel, Leather & Allied Products; Printing & Related Support Activities; Wood Products; Electrical Equipment, Appliances & Components; Textile Mills; Paper Products; Fabricated Metal Products; Plastics & Rubber Products; Petroleum & Coal Products; Primary Metals; Transportation Equipment; Nonmetallic Mineral Products; Machinery; Furniture & Related Products; and Computer & Electronic Products.

Most of the report's key metrics, including the PMI, dropped in September.
New orders, which are commonly referred to as the engine that drives manufacturing, eked out a slight 0.1% gain to 47.8, contracting for the second straight month after growing for 43 consecutive months over which time it had a cumulative average of 58.5. ISM said that three of the 18 manufacturing sectors it tracks grew in September.

Production, at 47.3, was down 2.2%, falling for the second straight month after 35 consecutive months of growth. Three manufacturing sectors reported growth in September. Employment slipped 1.1% to 46.3, down for the second month in a row. Supplier deliveries, at 51.1 (a reading above 50 indicates contraction) was 0.3% lower than August's 51.4 reading, which is the lowest reading since September 2016's 50.2, marking the 43rd consecutive month of slowing supplier deliveries.

September inventories, at 46.9, saw a 3% decrease, contracting for the fourth straight month, and customer inventories, at 45.5, rose 0.6%, slowing for the 36th consecutive month. Backlog of orders, at 45.1, was off 1.2% and contracting for the fifth month in a row. New export orders, at 41, were off 2.3% and down for the third straight month.

As in past months, comments in the report submitted by ISM member respondents were consistent, with commentary on slowing business conditions and ongoing trade tension between the United States and China.

A computer and electronics respondent said that September marked the second straight month in which shipments have outpaced new orders. And an electrical equipment, appliances, and components respondent noted that the economy seems to be softening, adding that the tariffs have caused much confusion in the industry.

ISM Manufacturing Business Survey Committee Chair Tim Fiore said in an interview that while the PMI and new orders again showed contraction in September, the most telling September metric is the decline in new export orders, which came at its highest rate of declines.

“That is a very negative [development] and has a direct relation to what is going on with the new order number,” he said. “And the customer inventories number is heading in the wrong direction, which is closer to ‘just right' and a roadblock for next month's activity. This is compounded by the fact that the backlog of orders shrunk. In August, we had a little bit of a rebound on backlog, which gave me some confidence that manufacturers were building up backlog, but it has now reversed. The demand side is super weak, and you expect production and employment to be low….and that is where they are, as they contracted pretty strongly together.”

Addressing inventories, Fiore said the sector is still matching import orders to input material levels, which makes a lot of sense, as manufacturers are closely watching new order levels softened four months ago, with the inventory number being at the 49 level, give or take, with the inventory number now at 46.9.

“I came to the conclusion that may be due to end of quarter activity…with a more uncertain environment than last quarter, making companies take an even more conservative approach,” noted Fiore. “But, general managers are looking at three factors going into their costs: factory equipment, employment levels, and raw material inventories. They cannot do anything about factory equipment, but they can do what they can with raw material inventories, in terms of keeping out what they don't want, and they have to be assessing employment levels, especially in light of the fact that they are in the 2020 business planning season. There is no more certainty now than there was in the last three or four months.”

Fiore made it clear that the current predicament manufacturers are up against are forcing them to take a long-term approach.

“The new export number is not supporting new orders, and it needs to come back, in order to give production something to work on and keep employment levels up and also provide backlog stability and growth,” he said. “It is just not happening now.”

On the supply chain front, he said manufacturers needs to make decisions on investment, as there is no indication the U.S.-China trade dispute will be resolved before the 2020 election. And for companies that have a global export product, or a high portion of input costs coming from China, that have yet to make a plan, that falls on them for not being proactive.

“That is the environment that everybody is in now, so it is a little late to be putting in a business plan for 2020 and start to move supply chains in time for the 2020 election….so people are acting now,” he said. “Any kind of significant investment has slowed, too.”

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