US Factory Activity Contracts Unexpectedly, Stirring Economic Growth Fears
October's ISM Manufacturing PMI fell to 48.7, marking an eighth straight month of decline as new orders and production weakened, complicating the Fed's policy outlook.
A key gauge of U.S. manufacturing activity unexpectedly contracted at a faster pace in October, signaling persistent weakness in the factory sector and raising concerns about the broader economic outlook. The data sent stocks lower as investors weighed the prospect of a slowdown against a still-cautious Federal Reserve.
The Institute for Supply Management (ISM) reported on Monday that its manufacturing Purchasing Managers' Index (PMI) registered 48.7, a decline from September's 49.1 and below consensus estimates of 49.3. A reading below 50 indicates contraction, and the October figure marks the eighth consecutive month the sector has been in decline.
The Dow Jones Industrial Average fell 0.9% in morning trading following the release, while the S&P 500 slipped 0.3% as markets digested the implications of the slowdown. The details of the report pointed to broad-based weakness. The Production Index slumped back into contraction at 48.2 after a brief expansionary reading in September. The New Orders Index, a forward-looking indicator of demand, remained in contraction at 49.4.
Comments from industry executives included in the ISM survey painted a challenging picture, citing global economic uncertainty and trade policy as significant headwinds. "Business continues to be severely depressed," noted an executive in the transportation equipment sector. Another from the chemical products space stated, "Customers are canceling and reducing orders due to uncertainty in the global economic environment and regarding the ever-changing tariff landscape." One manufacturer bluntly stated, "Steel tariffs are killing us," highlighting the ongoing impact of trade disputes on input costs, according to MarketWatch.
The manufacturing sector's struggles present a complex puzzle for the Federal Reserve. While weakening growth could argue for a more accommodative monetary policy, inflationary pressures within the report remain. The Prices Index, which tracks what manufacturers pay for raw materials, continued to show expansion, complicating the central bank's path forward.
This dynamic tempers expectations for imminent interest rate cuts. Speaking on Monday, Chicago Fed President Austan Goolsbee signaled caution, stating he would "feel uneasy frontloading rate cuts," a sentiment that suggests policymakers are not yet convinced that inflation is fully under control. Following the data, the U.S. dollar strengthened as investors scaled back bets on aggressive Fed easing.
The persistent slump in manufacturing contrasts with more resilient parts of the U.S. economy, particularly the services sector and a tight labor market. However, the factory downturn, now extending for the better part of a year, serves as a crucial barometer of economic health, reflecting weaker global demand and tighter credit conditions at home. Investors will now be closely watching upcoming labor market data to gauge whether the weakness in manufacturing is beginning to spill over into the broader economy.