Last week was full of fireworks, but unfortunately didn’t provide much clarity for investors attempting to decipher the outlook for the U.S. economy.
The week was marked by a sharp decline in interest rates as bond investors priced-in a more downbeat economic environment. The Institute for Supply Management publishes two closely watched surveys each month: one that covers the manufacturing sector and one that covers the services sector. When interpreting the results, note that 50 is the dividing line between expansion and contraction.
The manufacturing sector continues to weaken. The September reading came in at 47.8, the lowest level since 2009 (a time when the economy was still reeling from the financial crisis).
The services sector also showed a slowdown with a September reading of 52.6, still in expansionary territory, but enough of a drop month/month to bring about concern.
Offsetting these data points was another strong report on the U.S. labor market. 136k jobs were added during September and the unemployment rate fell to 3.5%. Clearly the weakness in the ISM readings has not made its way into the labor markets. Will it?
We think the key in answering this question will be watching corporate behavior. Any pullback in hiring plans, or worse, job cuts, will likely feed into what the ISM numbers are telling us, and negatively impact the consumer, which has thus far been resilient. Conveniently, corporations will begin to report Q3 earnings next week, so we may not have to wait long for the answer.