September Manufacturing Activity Revives After 3 Sluggish Months

Manufacturing activity modestly rebounded in September, the Institute for Supply Management reports. Today's update of the organization's widely followed ISM Manufacturing PMI Index reveals that "economic activity in the manufacturing sector expanded in September following three consecutive months of slight contraction." The index rose to 51.5 last month, up from 49.6 in August. A reading above 50 equates with economic expansion. Overall, it's a relatively upbeat report and one that surprised many economists.

It's also encouraging to see components of the broad index reviving as well. For example, the new orders and employment benchmarks also moved higher last month.


It's too soon to say that manufacturing has decisively turned away from what appeared to be a fatal swoon. But for the moment, at least, we can indulge in a sigh of relief with the news that the ISM index didn't continue dropping after a summer slump.

One indicator on its own can be misleading, of course, but quite a lot of pessimism has accompanied each of the last three monthly releases of the ISM report. Indeed, some analysts were quick to conclude that the slight dip under the 50 mark for this measure was a dark sign for the economy overall. It certainly wasn't encouraging, but some pundits jumped the gun. A review of history reminds that a) the ISM index has had quite a number of trips below 50 without the onset of a new recession; and b) when below-50 readings did accompany economic downturns, the ISM index was usually falling persistently. By contrast, the recent dip has been mild, with only slightly below-50 readings. As smoking guns go in cyclical analysis, this one so far has fallen well short of decisive for arguing that the economy has fallen off the cliff.


The fact that the ISM index has popped decisively over 50 suggests that the manufacturing sector, while hardly booming, is signaling that a new recession hasn't started, at least not for September. That alone might not mean much, of course. Judging an entire economy, especially one as big as America's, through the lens of one indicator is asking for trouble. Broader context is essential. The good news is that a wider read of the numbers still supports the idea that slow growth isn't on death's door, based on the numbers in hand. As I noted last week in the update of the Capital Spectator Economic Trend Index, the majority of economic and financial indicators are still trending positive. There's also some econometric support for anticipating that GDP for the third quarter (when the first estimate is released on October 26) will maintain a modest degree of forward momentum to keep us out of cyclical darkness.

All this modest optimism is subject to revision, of course, depending on what we learn in the September economic reports in the days and weeks to come. But the first data point out of the gate for profiling September offers an upside surprise. Economists were expecting a reading of 49.7 for September's ISM index, according to Bloomberg—considerably below the 51.5 that was reported earlier today.

Yes, it could be a fluke. Let's see what the rest of the week brings, including Friday's all-important payrolls report for last month. The consensus forecast sees a gain of 130,000 for private non-farm payrolls, according to Briefing.com. That's still tepid, but it would at least be an improvement over August's disappointing gain of 103,000.

Then again, one has to take the forecast du jour with a grain of salt. Sometimes that works in our favor, as today's ISM surprise reminds. But random error overall is still a two-way street.