Gauges of business activity in America continue to send mixed signals. For example, the Institute for Supply Management's popular manufacturing index declined in September to 47.8, significantly worse than expected and signaling the deepest contraction in activity since 2009. However, a similar manufacturing gauge from IHS Markit, with a much larger survey sample, improved in September to a 5-month high. Both metrics, though, clearly imply that activity in the goods-producing sector has slowed this year, but on the bright side the latest pessimism in the “soft” survey data has yet to be confirmed by the “hard” data on actual output. Further, even as activity in the U.S. has moderated, America remains on a much stronger footing than other developed economies.
It is also important to note that the manufacturing sector accounts for only 12.0 percent of total economic output in this country and an even smaller share of employment (8.5 percent). Since the tariffs resulting from the trade war between the U.S. and China have primarily targeted goods-producing firms, the larger and more sheltered service sector has enabled the broader economy to so far weather the ongoing trade dispute rather well. More mixed data from ISM and Markit out this morning on service sector activity, though, showed that even momentum in this arena is starting to get hit, albeit still signaling expansion instead of contraction. Again this is just survey data but pessimism can be contagious, and these latest reports, along with the recent price action in the stock market, should provide more evidence of the economy’s growing sensitivity to potential policy errors by the Federal Reserve or the White House.
Sources: Econoday, IHS Markit, ISM, WF, Twitter, FRBSL