PMI Data: U.S. Manufacturing Operating on All Cylinders, China Barely Above Contraction

A busy week of U.S. economic data began on Monday with a manufacturing report showing activity slowed in September. The data showed growth in new orders moderated sharply, but factories hired more workers, indicating the potential sustained strength in the sector.

The Institute for Supply Management (ISM) said its index of national factory activity dropped 1.5 points to a reading of 59.8 last month from 61.3 in August, which was the highest since May 2004.

The ISM continued to describe demand as remaining “robust.” The ISM also noted that “the nation’s employment resource and supply chains continued to struggle, but to a lesser degree.” It said factories continued to be “overwhelmingly concerned about tariff-related activity, including how reciprocal tariffs will impact company revenue and current manufacturing locations.”

In another report, the Commerce Department showed construction spending edged up 0.1 percent in August. Data for July was revised up to show construction outlays rising 0.2 percent instead of the previously reported 0.1 percent gain.

Traders and analysts had forecast construction spending increasing 0.4 percent in August. Construction spending rose 6.5 percent on a year-on-year basis.

China Official Factory PMI Falls to 50.8 Missing Expectations

While the U.S. ISM Manufacturing PMI may have missed the forecast at 59.8, it still remains well over a reading of 50.0. This indicates growth in manufacturing, which accounts for about 12 percent of the economy.

Growth in China’s manufacturing sector, on the other hand, cooled in September, official data showed on Sunday. This is clear evidence that the escalating trade dispute between the U.S. and China could be sending a chill through the already slowing Chinese economy.

The official Purchasing Managers’ Index (PMI) fell to 50.8 in September from 51.3 in August, but remained above the 50-point mark that separates growth from contraction for the 26^th straight month. Analysts were looking for a reading of 51.2.

Rising financing costs and slowing investment were already a drag on China’s economy even before the trade dispute began with the United States. In order to support the struggling economy, Beijing is moving to speed up infrastructure spending and offering help to smaller companies to prevent an even sharper slowdown. However, China’s policymakers are a little reluctant to throw money at the problems because of the current mountain of debt that exists because of bad financial stimulus decision in the past.

Tariff Scorecard

If you’re keeping score at home about the impact of the escalating trade dispute between the United States and China then one of the first reports you should be looking at is the monthly PMI. At this time, it looks as if the U.S. is clearly operating from a position of strength. While the U.S. has room to the downside, China doesn’t have that much more room to fall before the manufacturing sector moves into contraction.