US Manufacturing Contracts In September, Raising Questions About Fed's Next Move On Interest Rate Cuts

Economic data released Tuesday brought the latest insights for the U.S. manufacturing sector, drawing attention to how the Federal Reserve may respond to these developments.

Meanwhile, U.S. job openings data for August released on Tuesday indicated that openings remained steady, with hires and separations showing little change.

Markets now turn to key reports later this week, including the ADP employment change for August on Wednesday and Friday’s non-farm payroll, unemployment, and wage growth reports.

Two manufacturing activity indicators have been released, showing the following values:

• The S&P Global U.S. Manufacturing PMI was confirmed at 47.3 for September, above expectation of 47, and below 47.9 in August.
  
• The ISM Manufacturing PMI was confirmed at 47.2 for September, below the expectation of 47.5, and matching August’s 47.2.

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ISM Manufacturing PMI For September: Key Takeaways

• Manufacturing Sector Contraction: The manufacturing sector contracted for the sixth consecutive month in September, with the PMI holding steady at 47.2%, the same as in August. This marks the 22nd contraction in the last 23 months. According to ISM Manufacturing Business Survey Committee Chair, Timothy Fiore, “U.S. manufacturing activity contracted again in September, and at the same rate compared to last month.”
• Weak Demand and Slowing Production: The New Orders Index remained in contraction at 46.1%, while production slightly improved to 49.8%, nearing expansion but still below the 50% threshold. Fiore noted that “Demand continues to be weak, output declined, and inputs stayed accommodative.”
• Prices and Employment Decline: The Prices Index fell into contraction at 48.3%, down from 54% in August. Employment also fell faster, with the Employment Index dropping to 43.9%. Fiore explained, “Employment shrunk at a faster rate while production approached expansion.”
• Supplier Deliveries and Inventories: The Supplier Deliveries Index registered 52.2%, signaling slower deliveries, while the Inventories Index fell sharply to 43.9%. Fiore commented, “inputs ? defined as supplier deliveries, inventories, prices and imports ? generally continued to accommodate future demand growth.”
• Manufacturing GDP Decline: Seventy-seven percent of the manufacturing GDP contracted in September, up from 65% in August, indicating a worsening trend. Fiore highlighted that “the share of manufacturing sector GDP registering a composite PMI calculation at or below 45 percent… was 41 percent in September.” Only the Food, Beverage & Tobacco industry expanded among the largest sectors.

Job Openings Decline, Indicating Softening Labor Market Conditions

The Department of Labor also released the U.S. Job Openings and Labor Turnover Survey (JOLTs) for August.

• Job Openings Steady in August: The number of job openings remained relatively unchanged at 8 million by the end of August, but decreased by 1.3 million compared to a year ago. The job openings rate held steady at 4.8%.
• Hires Unchanged: In August, the number of hires stayed consistent at 5.3 million, with a hire rate of 3.3%. This shows stability in hiring activity across sectors.
• Quits Declining: The number of quits trended downward to 3.1 million in August, representing a drop of 159,000. The quits rate remained at 1.9%, signaling a slight reduction in voluntary job separations.
• Layoffs and Discharges Steady: Layoffs and discharges remained largely unchanged at 1.6 million, with a rate of 1.0%. A notable decrease in layoffs occurred in health care and social assistance (-52,000).
• Industry-Specific Changes: Job openings increased in the construction (+138,000) and state/local government sectors (+78,000), while decreases were seen in other services (-93,000). Separations rose in professional and business services (+149,000) but fell in accommodation and food services (-111,000).

Market Reactions

Before the data release, traders estimated a 60.5% chance of a quarter-point rate cut and a 39.5% chance of a half-point cut. After the data release, these probabilities shifted slightly to 59.5% for a quarter-point cut and 40.5% for a half-point cut.

Stocks were volatile on Tuesday, with the S&P 500 index, as tracked by the SPDR S&P 500 ETF Trust (SPY) down 1.22% as of 10:15 a.m. ET.

The dollar rose, with the Invesco DB USD Index Bullish Fund ETF , up 0.2%.

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