KEY DATA: ISM (Manufacturing): +0.2 points; Orders: +0.1 points; Employment: -2.2 points/Markit: -1 point; Orders: -0.5 point; Employment: +1.4 points
IN A NUTSHELL: "Chaos in Washington caused manufacturers to become just a little cautious."
WHAT IT MEANS: We are starting to get a picture of the impact of the government shutdown and debt ceiling crisis and at least so far, the numbers are not that bad. The Institute for Supply Management's survey of manufacturers indicated that activity was actually up slightly during the month. Fourteen of the eighteen industries reported gains. Orders improved a touch led by sharp increases in export demand and a more modest rise in imports. Despite continued improvement in orders, it looks like CEOs decided that the government shut down really was something to worry about. Both production and hiring moderated. With output growing more slowly but demand rising, order books filled more rapidly. That bodes well for future production.
The ISM report is the standard for private sector manufacturing surveys but Markit, a global financial services company, also produces an index that tracks, reasonably well, the Federal Reserve's Industrial Production Index. This survey goes back only to 2007. Markit found the exact opposite of what was reported in the ISM survey. Activity fell on a small decline in orders while employment increases. One common ground was in production. Both indicated that output was off.
MARKETS AND FED POLICY IMPLICATIONS: The dueling manufacturing surveys went in opposite directions. What does a good researcher do when data are inconsistent? Temporize! Basically, it appears that industrial production paused in October. But backlogs are rising and that bodes well for a big upturn in output if the October fall off was due to caution rather than actual demand. Both surveys had exports growing and that is a very positive result that mirrors the view that Europe is starting to come back. The economy did continue to move forward roughly at the pace it had been growing. Unfortunately, that was nothing great. Investors will likely focus on the ISM survey and that is more positive than the Markit numbers. That feeds into the euphoria created by more Fed liquidity. As for the Fed, some of the "inflation in the future" hawks are still bemoaning the lost opportunity to begin tapering in September. Of course, if the FOMC had started in September but paused this week, the markets might not have treated that behavior kindly. The Fed's on hold until next year. That is not a major problem as any impact of the excess liquidity in the system would not be seen for a long time and then, only if growth accelerates much more rapidly than anyone expects and the Fed gets too much behind the curve. That cannot be ruled out, but nothing needs to be done for the next three to six months.