Regional Fed Indexes: US Manufacturing Slowdown Is Accelerating
Tomorrow’s flash estimate of the US Manufacturing Purchasing Managers’ Index (PMI) for September is expected to tick up to a moderately positive 53.1, according to Econoday.com’s consensus forecast. Sounds good, except for one small glitch: this month’s numbers for manufacturing via three regional Fed bank indexes paint a considerably darker profile.
The headline benchmarks for a trio of sentiment indexes for this month (NY Fed, Philly Fed, and Richmond Fed) are collectively pointing to a relatively steep decline in manufacturing activity. Given the deeper shade of red we’re seeing in these sentiment indicators at the moment, it would be surprising if tomorrow’s PMI update from Markit Economics can deliver the fractional gain that economists overall are projecting.
The regional Fed data are an imperfect tool for anticipating the national PMI results on a month-to-month basis. But when three of the five Fed benchmarks have stumbled so decisively, it’s difficult to make a case for expecting improvement in the broad trend overall.
In fact, the competing numbers in the ISM Manufacturing Index have been pointing to a weaker national growth relative to the PMI updates in recent months. The August ISM headline benchmark slipped to 51.1, well below PMI’s 53.0 for last month (readings above 50 indicate growth, below 50 reflects contracting economic activity). The regional Fed numbers published so far this month suggest that the weaker ISM estimate offers a clearer reflection of the trend in this corner of the US economy.
If tomorrow’s PMI disappoints with a lower-than-expected number, which looks like a reasonable forecast at this point, the news will promote new questions about the US economy’s strength. It’s been clear for months that manufacturing has been stumbling. A weak manufacturing sector alone isn’t enough to trigger a US recession, although it certainly raises business-cycle risk. The question is whether the soft data in manufacturing is spilling over into other corners of the economy? There’s a weak case for arguing “yes”, although the overall economic trend for the US still favors growth for the near-term outlook. Will tomorrow’s PMI report tip the scales further over to the dark side? Stay tuned.