The Institute for Supply Management’s reading on the manufacturing sector released this morning disappointed coming in at 55.4 compared to last month’s 56.0 level and expectations for a reading of 56.5. The decline marks the first time that the ISM reading on manufacturing was lower month over month since April and also runs contrary to strength in other recent manufacturing indices like the Chicago PMI or the five regional Fed readings. Granted, that is not to say it is a weak reading. At 55.4, the index still indicates manufacturing activity expanded in September for a fourth month in a row at a healthy rate similar to what was last seen in late 2018/January 2019.

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The commentary section anecdotally paints a mixed but interesting picture of the economy. There was plenty of mention of improving sales and orders with some seemingly at very strong clips, but that wasn’t the case for everyone. One comment from the Transportation Equipment industry claimed that “Business is booming” while another comment from the Petroleum and Coal Products industry stated bluntly that they have yet to see any improvement. Others paint a more modest picture of the rate of improvement such as the comment from the Fabricated Metal Products and Paper Product industries. Those are perhaps more consistent with the headline index. While these comments paint a somewhat mixed picture as to whether or not and at what pace conditions are improving, one common theme appears to be supply chains trying to work out some kinks. There is mention of a range of topics concerning supply chains including longer lead times, price increases, shortages, and curbed production due to COVID quarantines.

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The hard numbers seem to back these claims up. Breadth was a bit mixed in this month’s report with the indices for Production, New Orders, Customer Inventories, and Imports all falling month over month. Despite those changes, the same indices remain in expansion/contraction as last month. The only indices to remain in contraction are those for inventories (which is not necessarily a negative) and Employment (just barely).

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The 7.4 point decline in the index for New Orders was not as large at the 7.6 or 15.1 point declines in March and April, respectively, but it marked a substantial drop nonetheless which stands in the bottom 5% of all monthly moves. Granted one welcome difference between this most recent decline and the spring is at what level the decline came from. While those drops in March and April were indicative of sharp contractions in New Orders, the September reading still points to New Orders increasing at a healthy clip just at a slower rate than what was observed in August.

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Given that New Orders continue to rise, the Backlog of Orders has likewise continued to rise. With manufacturing businesses continuing to have a full plate, the index for Backlog Orders rose to 55.2; the highest level since November of 2018.

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Given the growing list of to-do’s, companies continued to increase production with that index continuing to sit in the upper quintile of all historical readings. At 61 versus 63.3 last month, though, the index does indicate that the improvements in production decelerated a bit from August. With the anecdotal evidence provided in the commentary section as well as the uptick to 59 in the Supplier Deliveries index (a reading well off the recent spike from earlier in the year but still at the high end of the historical range), there is at least some evidence that this slowed production improvement could be a factor of supply chain problems.

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While production is improving and supply chains continue to face pressures, there still has not been much help on the employment front. The Employment Index rose for a fifth straight month with this month’s reading of 49.6, but that also leaves it just shy of its first expansionary reading in 14 months. In other words, although the index is at multi-month highs, there continues to be more businesses reporting lower than higher levels of employment. The fact that it’s improving, though, is a welcome trend and one that could continue given the strong demand and shrinking inventories. 

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