ISM numbers indicate a slowing September for the real economy

In the later part of the week, we got indicatons that the real economy slowed down in September. This includes, the Institute for Supply Management's PMI Manufacturing Index that came out on Wednesday, which showed that sector continued to struggle.

Economic activity in the manufacturing sector contracted in September for the seventh consecutive month, following a two-month expansion preceded by 26 straight months of contraction, say the nation's supply executives in the latest ISM Manufacturing PMI® Report….

"Looking at the manufacturing economy, 67 percent of the sector's gross domestic product (GDP) contracted in September, down from 69 percent in August. Twenty-eight percent of GDP is strongly contracting (registering a composite PMI® of 45 percent or lower), up from 4 percent in August. The share of sector GDP with a PMI at or below 45 percent is a good metric to gauge overall manufacturing weakness. Of the six largest manufacturing industries, only one (Petroleum & Coal Products) expanded in September, compared to two in August," says [Susan ]Spence, [who chairs ISM’s Manufacturing Business Survey Committee].

In addition, prices for manufacturers continued to rise at a widespread and significant level.

The ISM® Prices Index registered 61.9 percent in September, decreasing 1.8 percentage points compared to the previous month's reading of 63.7 percent, indicating raw materials prices increased for the 12th straight month (though at a slower rate compared to August). The Prices Index has increased 11.6 percentage points over the past 11 months. In the last eight months, the index reached its highest levels since June 2022, when it registered 78.5 percent. All of the six largest manufacturing industries — Machinery; Computer & Electronic Products; Food, Beverage & Tobacco Products; Petroleum & Coal Products; Transportation Equipment; and Chemical Products, in that order — reported price increases in September. "The Prices Index reading continues to be driven by increases in steel and aluminum prices that impact the entire value chain, as well as tariffs applied to many imported goods. Higher prices were reported by 32.5 percent of respondents in September, down from 33.5 percent in August. The share of respondents reporting higher prices trended up from November 2024 (12.2 percent) to April (49.2 percent), which was the highest level since June 2022 (65.2 percent)," says Spence. A Prices Index above 52.8 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Producer Price Index for Intermediate Materials.

"The highest level since 2022" is not good at all when you're talking about inflation, as that was when rices were increasing at a rate above 1.0% a month, and year-over-year inflation was at 9%.

Then on Friday, ISM reported that the service sector also underperformed in September.

The report was issued today by Steve Miller, CPSM, CSCP, Chair of the Institute for Supply Management® (ISM®) Services Business Survey Committee: “In September, the Services PMI® registered an unchanged reading of 50 percent, 2 percentage points lower than the August figure of 52 percent. The Business Activity Index moved into contraction territory in September, registering 49.9 percent, 5.1 percentage points lower than the reading of 55 percent recorded in August. This is the first time the index has entered contraction territory since May 2020. The New Orders Index remained in expansion in September, with a reading of 50.4 percent, down 5.6 percent from August’s figure of 56 percent. The Employment Index remained in contraction territory for the fourth month in a row and the fifth time in the last six months; the reading of 47.2 percent is 0.7 percentage point higher than the 46.5 percent recorded in August.

And just like we're seeing in the goods sector, prices are going up for services as well, and with less need to get more orders coming in for the future.

“The Prices Index registered 69.4 percent in September, a 0.2-percentage point increase from August’s reading of 69.2 percent. The index has exceeded 60 percent for 10 straight months, its longest such streak since 30 consecutive readings above 60 percent from October 2020 to March 2023.

“The Inventories Index dropped into contraction in September after three months in expansion territory, registering 47.8 percent, a decrease of 5.4 percentage points from August’s figure of 53.2 percent. The Inventory Sentiment Index expanded for the 29th consecutive month, registering 55.7 percent, up 0.2 percentage point from August’s figure of 55.5 percent. The Backlog of Orders Index was in contraction territory for the seventh month in a row, registering 47.3 percent in September, but with a 6.9-percentage point jump from the August figure of 40.4 percent to hit its highest reading since April (48 percent).

Put all this together, and you have a pretty gloomy picture.

These ISM reports should get extra attention from you as the government shutdown continues, because the regularly-scheduled releases of the US government's jobs and unemployment claims data has already been delayed, and September's inflation reports for later this month are also likely to be set back. So for us and the Federal Reserve, they will have to go on reports like the ISM to figure out where things stand with the overall economy. And from what we saw from the ISM, a stagflationary situation seemed to be happening for September.