Strong Showing For Manufacturing In PMI Composite

Amid a backdrop of rising inflation pressures, sharp slowing in the service PMI sample pulled down September's composite flash and masks a strong showing for manufacturing. The PMI composite fell to 53.4 which is well below Econoday's consensus for 55.1 and also below the low estimate for 53.8. Services fell to 52.9 vs a consensus for 55.0 while manufacturing, however, rose to 55.6 vs expectations for 55.0.

Weakness in services is centered in the year-ahead outlook which fell to its lowest level of 2018 reflecting concerns over cost pressures as input prices rose sharply and selling prices surged to a record high in survey data going back 10 years. Respondents to the service sample cited the need to pass through higher labor costs and increased input costs sourced from overseas. Cost concerns overshadow a rise in new orders, a build in backlogs, and a jump in hiring to a 3-1/2 year high.

The year-ahead outlook on the manufacturing side is also weak, slipping to a 2-1/2 year low as this sample cited higher costs tied to metal tariffs and the related need for forward purchasing. Some of these respondents said strong order levels are allowing them to push up selling prices. Yet other details, much like the service side of the report, are positive including rising orders and production. Another negative, however, is the slowest rate of hiring over the past year.

The service sector dwarfs manufacturing in size which explains its much greater impact on the composite. But though a fraction of the size of services, manufacturing is considered, however, a leading barometer for future economic change which is the silver lining in today's report. Yet not a silver lining at all is the inflation theme of the report, one that is certain to gain the attention of Federal Reserve policy makers who look to raise rates next week to defend against the risk of economic overheating.