U.S. manufacturing remained in contraction in September, but factory activity stabilized, new orders ticked up slightly and prices paid for inputs hit a nine-month low. Combined with falling interest rates, the environment has improved for a manufacturing recovery.
The Institute for Supply Management’s PMI remained unchanged from August at a level of 47.2. Any reading above 50.0 indicates expansion. New orders ticked up by 1.5 percent to 46.1 and the prices index declined by 5.7 percent to 48.3.
Source: Institute for Supply Management
Soft demand, including from overseas customers, helped reduce price pressures on materials and inputs. The ISM’s survey was conducted prior to a worker strike impacting East Coast seaports, which could increase logistics costs.
“Demand remains subdued, as companies showed an unwillingness to invest in capital and inventory due to federal monetary policy — which the U.S. Federal Reserve addressed by the time of this report — and election uncertainty,” noted Tim Fiore, chair of the Institute for Supply Management’s manufacturing survey committee. September was the sixth consecutive month that the PMI remained below the 50 threshold.
Demand slowing was reflected by the new orders index remaining in contraction territory; new export orders index contracting at a faster rate; backlog of orders index staying in strong contraction territory, and indications that customers’ inventories were “about right.” New export orders dipped by 3.3 percent to 45.3.
“New orders didn’t contract that badly in September,” Fiore said. “The fed cut rates, and we have an election coming, so we are maybe two months away from a manufacturing recovery.”
September’s production index increased by 5 percent to 49.8. Manufacturers are continuing to adjust their output and headcount to match the demand picture, which remains soft for the rest of the year, according to Fiore. Factory employment dipped by 2.1 percent to a level of 43.9 in September.
Employment shrunk at a faster rate while production approached expansion, with levels on par compared to August. Panelists cited continuing efforts by their companies to right-size workforces to levels consistent with projected demand.
Inputs — defined as supplier deliveries, inventories, prices and imports — generally continued to accommodate future demand growth, with inventories returning to low levels and suppliers showing some difficulty in meeting customer needs. Lower interest rates did not have an immediate effect on manufacturing.
“We are still in a ‘soft landing’ environment,” Fiore added. “Production increased as manufacturers matched their output with customer forecasts. Optimism regarding the rest of the year is fairly low, so I see this as preparation for the first half of 2025.”
Electronics and end markets
Credit: Sahand Babali
Although the computer and electronics sector did not expand from August, demand and production have increased steadily since May, according to the ISM. “The strategy of customer push-outs last year enabled those customers to adapt to the market. Now, while most companies are seeing a slowdown, we are seeing solid growth,” a tech industry manager told the ISM. Inventory in the electronics supply chain, with a few exceptions, is plentiful.
The transportation sector, a large buyer of electronics, has stalled, however. At strike at Boeing has paralyzed the U.S. aerospace sector. Additionally, “global demand continues to remain soft,” said a transportation equipment executive. “Fourth-quarter forecasts have been further reduced, with several new programs shifted from 2024 to 2025. Manpower, working capital and supplies are being flexed down in response.”
The previously anticipated shift from internal combustion engine to electric vehicle (EV) technology has been pushed out due to market response, the executive added. “Long-range plans are being adjusted to incorporate traditional products for longer, while new EV product offerings are being planned for slower rollouts.”
Overall, suppliers continue to have capacity, the ISM noted, with lead times improving and shortages reappearing.
Inventory levels in the electronics supply chain are being worked down, according to Edgewater Research, but orders are still soft. “The electronics outlook for 4Q remains subdued,” the firm reported, “with recovery timelines continuing to push out. While consensus still calls for a 1H25 recovery, the drumbeat continues to grow for recovery in 2H25, likely keeping the recovery muted throughout the year as inventories continue to digest across the supply chain.”
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