October 01, 2019 | 10:24
Factories and Construction .... Bad News
This may come as a shock, but U.S. manufacturers are struggling.... mightily. The U.S. manufacturing ISM unexpectedly (but no one should be falling out of their chairs, really) contracted for the second month in a row, landing below the key 50 mark again. The headline dropped to a decade-low 47.8 in September (specifically June 2009) from the 3½-year low of 49.1 in August. Also note that the index has declined for six consecutive months, a streak not seen since 2015. Of the five equally-weighted components, it wasn't pretty. Here are the key ones worthy of a mention. Sure new orders rose but the 0.1 pt increase was nothing to write home about... it is still sub-50 (or 47.8, lowest since April 2009). Production was down for the 3rd straight month (-2.2 pts to 47.3, also lowest since April 2009). Some GM impact here? Payrolls were trimmed for the 3rd consecutive month, down 1.1 pts to 46.3, lowest since January 2016. Keep that in mind ahead of Friday's official jobs report.
So what is going on? The trade war, clearly, is the biggest issue facing manufacturers (and others), with the hot/cold trade talks (cool right now) moving forward but tariffs still in place and rising. It was the start of September that the 15% tariff on $125 bln of China's imports kicked in. And, more are coming on October 15 (then again on December 15) unless, of course, there's some miraculous breakthrough during those high-level talks next week. Don't hold your breath. And it is not just China, as the U.S. was cleared to impose tariffs on the EU, thanks to the WTO's ruling (Airbus/Boeing). On the plus side, a mini-trade agreement was worked out with Japan.
Only a shocking 3 industries of the 18 in the survey said "we're expanding!", which is the lowest since at least 2013 and down from 9 in the prior two months. Their comments did not indicate that this is going away anytime soon.
In a separate release, U.S. construction spending rose in August but the 0.1% increase was really disappointing. Housing at least contributed to the headline but non-residential construction weighed heavily. Although non-residential structures took an 11.1% dive in Q2, it looks like it struggled (that word again!) in the third quarter.
Bottom Line: Some downside risk now, to Q3 growth, and another rate cut is still in the cards.