US ISM: Inventories hold the key to understanding what is happening – Wells Fargo

 Data released on Monday showed the ISM Manufacturing Index dropped during September more than expected to the lowest level in two years. According to analysts at Wells Fargo, key measures point to slowing activity, but it is inventoried that hold the key to understanding what is happening in the sector today. They argue that “firms are tired of having input prices weigh on profits, but are also leery of procuring hard-to-get supplies. In an effort to mitigate both of these risks, they are making sure someone else is holding the inventories.”

Key Quotes: 

“To understand what is happening in the manufacturing sector today it is helpful to consider everything in the context of inventories.”

“Employment dropped 5.5 points to fall back into contraction territory, though with respondent comments still focused on tight labor market conditions, we suspect this remains a supply problem rather than a demand one. Still this was the largest monthly component swing and could signal slower payroll growth or at least less of a boost from manufacturing jobs.”

“Tired of having input prices weigh on profits but also leery of procuring hard-to-get supplies, firms are now trying to mitigate both risks by making sure someone else in their supply chain is holding the inventories. This is clearly stated by a representative from the food & beverage industry said, "It seems no one wants to keep inventory on hand anymore.”

“We expect these supply and inventory dynamics to direct manufacturing activity for some time. To the extent supply issues continue to ease, production held up in September but only modestly so. At 50.6, the production index remained dangerously close to the 50-line distinguishing expansion from contraction. Continued production amid some supply easing has allowed producers to chip away at order backlog and is driving supplier devliery times lower.”