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PMI Hits 10-Year Low as Tariffs, High Inventories Take Their Toll

Oct. 2, 2019
Monthly manufacturing index falls for seventh straight month to 47.8%.

In June 2009, as the U.S. manufacturing sector was recovering from the Great Recession, the PMI manufacturing index rose to 46.3%. A decade later, the index again is flirting with that number—only this time, instead of a recovery, the index is continuing its rapid descent.

The Oct. 1 PMI reading was at 47.8%, a decline of 1.3 percentage points from August’s 49.1 reading, which had been the lowest in three years. The September PMI reading was the lowest in the last 10 years.

The PMI had been over 60% in August 2018, signifying growth 20% above the break-even growth level of 50%. Since then, the PMI has plummeted, with the Oct. 1 reading marking the seventh straight month of decline—and the second straight month below 50%, signifying regression in the manufacturing economy.

The U.S. stock market took notice of the news, with the Dow Jones Average falling 1.28% and the S&P 500 dropping 1.23% on Oct. 1.

Continuing trade wars, a softening global economy, and sharp declines in inventories all have combined to pressure manufacturing after a decade-long rebound from recession.

“Comments from the panel reflect a continuing decrease in business confidence. September was the second consecutive month of PMI contraction, at a faster rate compared to August,” said Timothy Fiore, chairman of the Institute for Supply Management’s Manufacturing Business Survey Committee. “Demand contracted, with the New Orders Index contracting at August levels, the Customers’ Inventories Index moving toward ‘about right’ territory and the Backlog of Orders Index contracting for the fifth straight month (and at a faster rate).

“Global trade remains the most significant issue, as demonstrated by the contraction in new export orders that began in July 2019. Overall, sentiment this month remains cautious regarding near-term growth,” Fiore said.

That sentiment was directly reflected in the bearish comments from committee members. Among the comments:

  • “Second month in a row in which shipments have outpaced new orders.” (Computer & Electronic Products)
  • “Continued softening in the global automotive market. Trade-war impacts also have localized effects, particularly in select export markets. Seeing warehouses filling again after what appeared to be a short reduction of demand.” (Chemical Products)
  • “Business outlook remains cautious. Orders seem to be decreasing, but luckily not as sharp of a decrease as we were expecting.” (Transportation Equipment)
  • “Chinese tariffs going up are hurting our business. Most of the materials are not made in the U.S. and made only in China.” (Food, Beverage, & Tobacco Products)
  • “General market is slowing even more than a normal fourth-quarter slowdown.” (Fabricated Metal Products)
  • “Demand softening on some product lines, backlogs have reduced, and dealer inventories are growing.” (Machinery)
  • “Business has been flat for us. Year-over-year growth has slowed dramatically.” (Miscellaneous Manufacturing)
  • “We have seen a reduction in sales orders and, therefore, a lower demand for products we order. We have also reduced our workforce by 10%.” (Plastics & Rubber Products)
  • “Incoming sales are sluggish for this time of year.” (Furniture & Related Products)
  • “Economy seems to be softening. The tariffs have caused much confusion in the industry.” (Electrical Equipment, Appliances & Components)

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