October ISM supports potential 25 bps cut by the Fed next week

The October ISM Manufacturing report revealed a continued contraction in U.S. manufacturing activity, marking the seventh consecutive month of decline and the 23rd contraction in the last 24 months. The Manufacturing PMI stood at 46.5%, a slight drop from September’s 47.2% and the lowest reading of 2024, underscoring persistent weakness in the sector. Among the five primary indices influencing the PMI, only the Supplier Deliveries Index remained in expansion territory, suggesting that demand for manufactured goods continues to be soft.

The report will raise some concerns around economic health. The rise in Prices paid could suggest that it could impede the path of the Fed's rate cut plans but most of the rise appars due to energy costs which may be viewed as transitory.

New Orders, an important indicator of future production, registered 47.1% in October, marginally higher than September’s 46.1%. Although still in contraction, this slight uptick suggests a tentative improvement, though panelists expressed continued concern about weak demand due to economic uncertainties and restrained capital investment. Reports from respondents noted a cautious approach to new spending and inventory, with economic and election-related uncertainties shaping a “wait-and-see” approach for both domestic and international customers.

Production fell sharply, with the Production Index declining to 46.2% from 49.8% in September, further deepening the contraction. Several key industries, including Textile Mills, Primary Metals, and Chemical Products, reported reduced output due to lower backlogs and weak new order flows. Manufacturers appear to be adjusting production downward, reflecting caution in the face of subdued demand, as companies continue to reduce inventory levels and manage costs amid an uncertain economic landscape.

The Prices Paid Index increased notably to 54.8% in October, reversing September’s 48.3% contraction reading and signaling rising input costs. This uptick was primarily driven by increased energy prices, specifically crude oil and natural gas, along with higher costs for metals and transportation. The price increases indicate underlying inflationary pressures despite slower demand, suggesting that manufacturing costs remain a challenge, particularly in energy-intensive industries such as Food, Beverage & Tobacco Products and Machinery.

Supplier Deliveries slowed slightly, with the index recording 52.0% compared to September’s 52.2%, indicating some difficulty in meeting demand even as overall production wanes. Supply chain managers reported improved availability of some components but continue to experience delays with electrical and electronic components. With inventories remaining low and lead times generally improving, the supply environment has stabilized somewhat, though certain supply chain vulnerabilities persist, particularly in the high-tech and electronics segments.

Employment in manufacturing continued to shrink, though the Employment Index edged up to 44.4% from 43.9% in September. Companies are reportedly right-sizing their workforces to align with reduced production volumes and lower demand, relying on attrition, layoffs, and hiring freezes to maintain flexibility. This marks the fifth month of employment contraction, with only Food, Beverage & Tobacco Products showing consistent workforce expansion as companies adjust to a prolonged low-demand environment.

The report's commentary from survey participants provided further insights into sector-specific challenges, with many respondents highlighting cautious spending due to macroeconomic uncertainties. Some industries, like Food, Beverage & Tobacco Products, reported strong sales despite the overall slowdown, while others, such as Chemical Products and Machinery, indicated significant reductions in new orders and project delays. Overall, the October ISM Manufacturing report suggests continued headwinds for U.S. manufacturing, with elevated input costs and restrained demand likely to sustain the sector's contractionary trend in the near term.