The ISM Manufacturing Index is derived from a survey of purchasing managers and their outlook on overall conditions by looking at factors such as orders for durable goods, industrial production and hiring. It gives a general direction rather than the specific strength of the factory sector and manufacturing activity in the U.S. A reading above 50 is an indicator that the manufacturing sector is growing while a reading below 50 indicates a contraction.
The September ISM Manufacturing report came in at a level of 47.8, a ten-year all-time low, and therefore below August’s index of 49.1. The index is down 20% from September of 2018, when it was at 59.8.
A possible explanation of this low reading could be increased concern with regards to trade concerns with China, a sentiment which may exaggerate the change in rating more than actual economic activity reflects. Still, caution should be exercised; though the index is not a perfect indicator, major decreases in it have preceded the last two recessions. General Motors strikes and the Boeing 737 grounding also likely decreased manufacturing production and sentiment significantly. Decreasing average readings of the ISM Manufacturing Index over the last seven months indicate the manufacturing sector may continue to contract. It is worth keeping in mind that manufacturing makes up a relatively small percentage of the US economy, which would minimize the effect of the sector’s contraction on the US economy.
September 1, 2019