Manufacturing sees contraction for seventh consecutive month, reports ISM

Manufacturing output fell in September, for the seventh consecutive month, according to the new edition of the Manufacturing Report on Business, which was issued today by the Institute for Supply Management (ISM).

The report’s benchmark reading, the PMI, at 49.1 (a reading of 50 or higher indicates growth), was up 0.4% compared to August, contracting, at a slower rate, for the seventh consecutive month, with the overall economy growing, at a faster rate, for the 65^th consecutive month.

The September PMI was 0.2% above the 12-month average of 48.9, with January’s 50.9 and October’s 46.9 marking the respective high and low readings for that period.

ISM reported that five manufacturing sectors saw growth in September, including: Petroleum & Coal Products; Primary Metals; Textile Mills; Fabricated Metal Products; and Miscellaneous Manufacturing. Sectors seeing contraction included: Wood Products; Apparel, Leather & Allied Products; Plastics & Rubber Products; Paper Products; Furniture & Related Products; Chemical Products; Electrical Equipment, Appliances & Components; Transportation Equipment; Nonmetallic Mineral Products; Machinery; and Computer & Electronic Products.

ISM cited the following for the report’s key metrics:

• New Orders, at 48.9, fell 2.5% after growing in August, with six sectors reporting growth;
• Production, at 51.0, rose 3.2% after growing in August, with eight sectors reporting growth;
• Employment, at 45.3, increased 1.5%, contracting, at a slower rate, with one sector reporting growth;
• Supplier Deliveries, at 52.6 (a reading of 50 indicates slower deliveries), slowed, at a faster rate, for the second consecutive month, with nine sectors reporting slower deliveries;
• Inventories, at 47.7, fell 1.7%, contracting, at a faster rate, for the fifth consecutive month, with seven sectors reporting higher inventories;
• Customers’ Inventories, at 43.7, were down 0.9%, coming in too low, at a faster rate, for the 12^th consecutive month, with three sectors reporting;
• Prices, at 61.8, down 1.8%, increasing, at a slower rate, for the 12^th consecutive month, with 13 sectors reporting higher prices; and
• Backlog of Orders, at 46.2, contracting, at a slower rate, for the 36^th consecutive month

Tariffs and the economy were once again the main themes cited in ISM panelist comments.

“Business continues to be severely depressed,” said a Transportation Equipment panelist. “Profits are down and extreme taxes (tariffs) are being shouldered by all companies in our space. We have increased price pressures both to our inputs and customer outputs as companies are starting to pass on tariffs via surcharges, raising prices up to 20 percent. The addition of the derivative steel and aluminum tariffs in the middle of the month — with no announcement — was devastating. Interest-rate lowering or the ‘One Big Beautiful Bill’ will not impact our business, as all capital projects are on hold until there is some level of certainty and customers start to place orders for new equipment again. We believe we are in a stagflation period where prices are up but orders are down due to tariff policy, and again, customers are not willing to pay the higher prices, so they are just not buying. Continuing to find ways to reduce overhead, which means letting go of experienced workers.”

And a Machinery panelist pointed to how ongoing macroeconomic conditions highlighted by interest-rate management and tariffs are continuing to impact customer purchasing decisions, which are resulting in subdued production rates and also growing cost concerns on direct material and operations.

In an interview with LM, Susan Spence, Chair of the ISM's Manufacturing Business Survey Committee, explained in looking at the September report, it is worth looking at subindexes in the previous one in August, which saw gains in New Orders, commonly viewed as the engine that drives manufacturing, but subsequently retreated in September.

“That [growth] kind of moved into Production in September, which makes sense, and maybe we will see an uptick in Backlog of Orders, which depends on when companies log their orders. But I am afraid that what we are seeing may be blips and I don’t see much to get me excited related to the tides turning—especially when looking at these panelists’ comments. For every panelist that gave a positive indication on demand in the report, there were two saying it is softening. And for every positive comment there were six that were negative, with more than half saying it is due to tariffs.”

What’s more, Spence observed that 67% of manufacturing GDP contracted in September, down from 69% in August, with 28% of manufacturing GDP, at a composite of 45 or lower, up from 4% in August.

In addition to tariffs, another obstacle facing the manufacturing sector is the shutdown of the federal government, which went into effect earlier today, with Spence referring to her time in the private sector as a guide, of sorts, in 2009, during a previous shutdown.

“If you are a manufacturing person and depend on a government official coming into your factory, whether it is FDA or DCAA, to sign off on something like aerospace components or helicopter parts, it is likely you will have to continue on your own dime, based on past shutdowns, because the government was not funding defense, at least for that part of the shutdown. Any sector that depends on a government employee to come in and approve or audit if they're not deemed an essential employee may see a slowdown. It is going to put more stress on the economy on top of everything else, given how things are upside down, with tariffs, uncertainty in regard to what is going to happen next, and then New Orders not flowing and companies not hiring and not spending money, and another interest rate cut won’t matter. Those are the things we are hearing.”