Alarming manufacturing data shouldn't make you sound the alarm: Morning Brief

Wednesday, October 2, 2019

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'Not consistent with recession across the whole economy'

Manufacturing activity in the U.S. slumped to its lowest level since June 2009, according to data from the Institute for Supply Management (ISM) released Tuesday.

In response, it was a risk-off day in financial markets: Treasuries rallied, stocks sold off, gold rallied, and the VIX surged.

But the ISM's report wasn't the only piece of manufacturing data released yesterday — IHS Markit also released its own gauges of U.S. and global manufacturing activity. And while neither report paints a particularly rosy picture of the U.S. and global economy, this data highlights the risks posed by Trump's trade war more than it sets off alarm bells indicating the economy is about to roll over.

"[The ISM] survey is not consistent with recession across the whole economy," said Ian Shepherdson, chief economist at Pantheon Macroeconomics. "But the warning signs here are clear enough. The trade war is wreaking havoc."

Timothy Fiore, chair of the ISM's survey committee said that, "Global trade remains the most significant issue, as demonstrated by the contraction in new export orders that began in July 2019. Overall, sentiment this month remains cautious regarding near-term growth."

"The decline in export sales was the second-fastest for nearly five years," IHS Markit said in its report. "Ongoing trade wars also reportedly exacerbated difficult external demand conditions."

Neil Dutta at Renaissance Macro highlighted on Tuesday that this is not the first time in recent history that ISM and Markit's surveys have diverged. In 2017-18, for instance, ISM's data probably overstated growth, and to Dutta's mind, this data could be understating growth now.

Paul Ashworth at Capital Economics said Tuesday that the ISM report also likely reflects the ongoing strike at General Motors, saying that while ISM's data, "will reignite fears that the US economy is headed for a recession," the global manufacturing backdrop has actually stabilized over the last few months.


ISM's PMI index came in at 47.8 on Tuesday, indicating contraction in the U.S. manufacturing sector; IHS Markit's index, in contrast, hit a five-month high of 51.1, indicating expansion in the sector.

But ISM also notes in its report that a PMI reading over 43.2 indicates that the overall economy is generally expanding. In other words, to say with confidence that the economy is in or near recession, this data is going to have to get a lot worse.

Some economists, however, were less inclined to view the trade war and the manufacturing slump as events that can be isolated from the rest of the economy's current outlook.

"There is no putting lipstick on this one!" said Gregory Daco, chief U.S. economist at Oxford Economics.

Meanwhile, Deutsche Bank economist Torsten Sløk offered the gravest assessment, saying this data will likely deteriorate in the months ahead. "This is serious,” Sløk wrote Tuesday. “There is no end in sight to this slowdown, the recession risk is real."

And President Trump, of course, blamed his favorite punching bag for Tuesday's poor data — Federal Reserve Chair Jay Powell.

"They are their own worst enemies, they don't have a clue," Trump said of the Federal Reserve on Tuesday.


By Myles Udland, reporter and co-anchor of The Final Round. Follow him @MylesUdland

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