When is the weakest headline reading in the ISM Manufacturing report since December 2012 not considered such a bad thing? When it comes in better than expecting to show modest expansion rather than contraction. In today’s ISM Manufacturing report for the month of October, many economists were expecting a sub 50 reading with consensus estimates ranging from 49.8 to 50.0 depending on the source. The actual reading came in at 50.1 which was down a tenth of a point from September’s reading. Clearly, the manufacturing sector of the US economy remains weak, but the market’s response was, “Tell me something I don’t know.”
The table below breaks down this month’s ISM Manufacturing report by each of its components. While the headline reading was down this month, the majority of components (6 out of 10) were actually higher on the month with gains in New Orders (+2.8) and Production (+1.1) leading the way higher. On the downside, the biggest weakness this month was in Customer Inventories (-3.5), Imports (-3.5), which fell to its lowest level since June 2009, and Employment (-2.9). While the month/month readings were mostly higher in October, relative to October of last year, there was broad-based weakness as the only component that was higher on a y/y basis was Customer Inventories.
As mentioned above, the Employment component of October’s ISM Manufacturing report saw one of the largest declines this month. As shown in the chart below, the level for this component is now at its lowest level since August 2009. At first glance, that would not bode well for this Friday’s employment report, but it is important to keep in mind that manufacturing is a relatively small share of the total US economy. The more important gauge to watch in this respect will be the employment component of Wednesday’s ISM Services report.