Washington Doubles Down on Uncertainty, Potential Drag for Private Sector
- The ISM Manufacturing Index for September increased to 56.2 percent, above expectations.
- Economic data will be limited by the federal government shutdown.
- Clinton era shutdown of 28 days dragged GDP growth by about 25 basis points.
- Uncertainty rolls over to the Fed. An October taper is less likely.
- The early word on auto sales looks disappointing.
Manufacturing conditions improved in September according to the Institute for Supply Management. The ISM Manufacturing Index ticked up more than expected to 56.2, indicating favorable and improving conditions for U.S. manufacturers. Most components of the index were solidly into positive territory, including the sub-indexes for new orders, production and employment. Only customers’ inventories and backlog of orders slipped for the month. Anecdotal comments were generally positive, with a nod to the recuperating U.S. housing sector and more support from overseas markets.
Today’s strong manufacturing report is tempered by the federal government shutdown early this morning of non-essential services. This is the first such shut-down since the Clinton presidency when non-essential federal services were suspended for a total of 28 days over two intervals, from November 14, 1995 through November 19, 1995, and again from December 16, 1995 to January 6, 1996. It is broadly estimated that the shutdown at that time dragged real GDP growth by about 25 basis points, roughly 1 basis point per day. Using that very rough guide we can say that a shutdown of a week or less will not exert significant drag on the private sectors. A shut down of more than two weeks starts to become visible in the aggregate data. Economic data itself is already a casualty of government gridlock. The scheduled release this morning of construction spending data for August was suspended. It appears likely that Friday’s scheduled release of employment data for September will not happen.
The federal data blackout is partially mitigated by private sector sources and by the Federal Reserve, which will not be affected by the federal shutdown. Tomorrow, the ADP Employment Report for September will be released, giving us a view into national-level job growth for the month. However, uncertainty begets uncertainty. With the additional drag of a federal government shutdown on the economy, it is looking less likely that the Federal Reserve will begin the process of dialing back its program of asset purchases soon. We are still a month away from the next FOMC policy announcement, due October 30.
Auto sales for September may already be a casualty of increasing uncertainty. Early announcements by auto makers of September sales were weaker than expected. According to the Chicago PMI, business sentiment grew 2.7 points to 55.7 in September supported by new orders, production and deliveries. General business activity amongst Texas manufacturers increased 7.8 points, while company outlooks remained positive in September.
Market Reaction: U.S. equity prices opened higher. Treasury rates are up at the long end of the yield curve. Oil is up to $101.31/barrel. The dollar is up against the euro and down versus the yen.
For a PDF version of this Comerica Economic Alert click here: ISM-MF 100113.