The ISM manufacturing industries composite index edged down slightly to 52.6 in September.
Production decelerated – the production index dropped by 6.2 points to 55.7.
New orders also decelerated – the new orders index dropped by 4.1 points to 60.8.
Inventories contracted at a much reduced rate.
New export orders sustained good forward momentum at 55.0.
The employment index stalled at 46.2
The prices paid index dropped by 1.5 points to 63.5.
After a strong month in August, manufacturing industries showed a fairly pronounced deceleration in September. The deceleration was most evident in production activity and new domestic orders. Forward momentum on new export orders remained about unchanged.
The deceleration in production and new domestic orders most likely reflects extreme caution in the business sector. Inventories are contracting at a much reduced rate, indicating that the prospective pinch on inventories is becoming much less of an issue.
In addition, retailers are being extremely cautious about placing orders for seasonal sales in view of weak consumer confidence and deteriorating buying intentions after a summer pop connected with the “cash for clunkers” program.
Partly reflecting these developments of extreme caution in the business sector, we have seen less upward momentum in freight activity in the past several weeks compared with the June/July period.
The pullback in momentum in the manufacturing sector simply reflects the underlying reality that when you strip away the various fiscal stimulus programs and measures, there is not much underlying strength in spending in the economy. This is an issue that will play out in slower growth numbers in the fourth quarter of 2009 and the first half of 2010.
With core inflation decelerating to ranges well below the Fed’s target, the unemployment rate under further upward pressure, and continued severe pressure on banking system capital reserves, the clear signal here is that the FOMC needs to maintain an aggressive stance on monetary policy for several more quarters. Premature hand-wringing over the Fed’s prospective exit strategy at this point in the fragile recovery is an unnecessary distraction.