Summary: ISM manufacturing PMI steady in September, below expectations; ISM: demand weak, output declines, inputs accommodative; US Treasury yields fall; expectations of Fed rate cuts soften, seven cuts still priced in; ISM: reading corresponds to 1.3% US GDP growth annualised.
The Institute of Supply Management (ISM) manufacturing Purchasing Managers Index (PMI) reached a cyclical peak in September 2017. It then started a downtrend which ended in March 2020 with a contraction in US manufacturing which lasted until June 2020. Subsequent month’s readings implied growth had resumed, with the index becoming stronger through to March 2021. Readings then declined fairly steadily until mid-2023 and have since generally stagnated.
According to the ISM’s September survey, its manufacturing PMI recorded a reading of 47.2%, below the generally expected figure of 47.6% but in line with August’s reading. The average reading since 1948 is roughly 53.0% and any reading below 50% implies a contraction in the US manufacturing sector relative to the previous month.
“US manufacturing activity contracted again in September, and at the same rate compared to last month,” said Timothy Fiore of the ISM Manufacturing Business Survey Committee. “Demand continues to be weak, output declined and inputs stayed accommodative.”
US Treasury bond yields fell almost uniformly across the curve on the day. By the close of business, the 2-year Treasury bond yield had lost 4bps to 3.60% while 10-year and 30-year yields both finished 5bps lower at 3.73% and 4.07% respectively.
In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months softened, although at least another seven 25bp cuts are still factored in. At the close of business, contracts implied the effective federal funds rate would average 4.525% in November, 4.32% in December and 3.80% in February. September 2025 contracts implied 3.025%, 180bps less than the current rate.
Purchasing managers’ indices (PMIs) are economic indicators derived from monthly surveys of executives in private-sector companies. They are diffusion indices, which means a reading of 50% represents no change from the previous period, while a reading under 50% implies respondents reported a deterioration on average. A reading “above 42.5%, over a period of time, generally indicates an expansion of the overall economy” according to the ISM’s latest calculations.
The ISM’s manufacturing PMI figures appear to lead US GDP by several months despite a considerable error in any given month. The chart below shows US GDP on a “year on year” basis (and not the BEA annualised basis) against US GDP implied by monthly PMI figures.
According to the ISM and its analysis of past relationships between the PMI and US GDP, August’s PMI corresponds to an annualised growth rate of 1.3%, or about 0.3% over a quarter. Regression analysis on a year-on-year basis suggests a 12-month GDP growth rate of 1.7% five months after this latest report.
The ISM index is one of two monthly US PMIs, the other being an index published by S&P Global. S&P Global produces a “flash” estimate in the last week of each month which comes out about a week before the ISM index is published. The S&P Global August flash manufacturing PMI registered 48.0%, down 1.6 percentage points from July’s final figure.