Incoming reports on business activity in America remain encouraging, such as the various regional manufacturing gauges from the Federal Reserve released last month that continue to confirm a V-shaped rebound in factory output. The Institute for Supply Management’s (ISM’s) national manufacturing index similarly ended September at 55.4, a slight decline from August but still the 2nd-highest reading in nearly two years. The biggest weak spot last month was the new orders component, but for now this appears mainly due to a combination of base effects and elevated uncertainty as we near the election. The prices component on the other hand moved even further into expansion territory, in turn providing more support for the “reflation trade” gaining momentum in 2021.
The employment component also strengthened last month but remained just below the crucial 50 level, therefore still signaling a net contraction in manufacturing jobs. As the economy continues to recover and more factories come back online, though, hiring here and in other industries should improve. This of course assumes that we can avoid another major flareup in the pandemic, which is why many business managers are likely continuing to closely monitor the daily infection statistics. Manufacturers also derive a lot of revenue overseas, so the latest COVID waves in Europe may be especially concerning. As for the larger U.S. services sector, this arena is a bit more sheltered from foreign economies, which may help explain why the ISM non-manufacturing index actually signaled a faster rate of activity expansion in September. However, surveyed managers still expressed what can at best be described as “cautious optimism” regarding their near-term business and economic outlook. Highlighted comment examples can be found below:
- "Business has been fairly stable over the summer; however, there is still a great deal of uncertainty as we move into fall and winter [and] how our sales volume will be." (Agriculture, Forestry, Fishing & Hunting)
- "Work orders are improving rapidly. Lack of available labor is having a significant impact on our ability to fulfill orders." (Construction)
- "Insurance industry will experience some impact from weather- and protest-related property damage and business interruption." (Finance & Insurance)
- "Customer confidence creeping back as a belief in the end, or perhaps taming, of COVID-19 increases; however, it comes with a high degree of caution regarding uncertainty in the marketplace and a reluctance to commit. Exploratory conversations are increasing, but hard orders are not." (Professional, Scientific & Technical Services)
- "Business has come back solidly since mid-July, with a strong August and September. However, suppliers are plagued with lead-time challenges driven by (1) cautionary practices in terms of rebuilding capacity, (2) hiring difficulties for those trying to build capacity and (3) the impact of recent hurricanes in some regions." (Retail Trade)
Sources: Econoday, ISM, BAML, FRBSL