The ISM Manufacturing Index increased in September to 51.6 from 50.6, reflecting a stronger pace of expansion in the manufacturing sector. As an early reading of last month’s economic activity, the ISM index offers a bit of optimism at a time of rising fears that a new recession is approaching.
A reading above 50 indicates growth and so the higher number is encouraging if only because it suggests that the odds of another contraction look a bit lower compared with expectations ahead of the report. Every post-war recession has been accompanied by below-50 levels in the ISM. Although every predictor is flawed, today’s ISM update offers one more data point on the side of optimism.
Let’s also note that even with September’s rise the ISM index has fallen sharply from the 60-plus readings from earlier this year. It’s obvious that the economy has slowed and the decline in the ISM since this year’s first quarter confirms the retreat. The question is one of whether the economy will continue to stumble. For what it’s worth, the ISM update suggests there’s still reason to wonder.
For some additional context, let’s review ISM’s rolling 12-month percentage change vs. the stock market, industrial production and new orders for durable goods (note that only equities and ISM are updated through September). The ISM Manufacturing Index is turning up on an annual basis and at a slightly faster pace compared with the August change. That’s in contrast with the S&P 500, which declined slightly through the end of September vs. a year ago. Is that a sign that stocks will play catch-up in the near term? Or is the ISM’s latest bout of optimism misguided?
“We’re seeing the post-Japan rebound in auto production and auto sales,” says Julia Coronado, chief economist for North America at BNP Paribas. “That’s pushing up the production index, but new orders remain relatively anemic. There is still some underlying weakness, but we’re getting that post-Japan rebound.”
Tom Porcelli, chief U.S. economist at RBC Capital Markets, is impressed, if only slightly. “ISM is showing some pretty strong resilience here,” he says. “I’m surprised at how well it’s performing, particularly in the face of all of these headwinds. As a key leading economic indicator this has got to be a pretty big relief to most people.”