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Krishen Rangasamy, analyst at National Bank Financial, notes that world stock markets and oil prices were hammered yesterday by the surprising slump of the U.S. ISM manufacturing index.

Key Quotes

“September’s reading of 47.8 for the index was the lowest since June 2009, with all major sub-indices (production, new orders and employment) in contraction territory, i.e. below 50.”

“While we acknowledge the ongoing trade war is wreaking havoc and weighing significantly on factories worldwide, we advise caution in interpreting September’s U.S. ISM manufacturing index. Note that another survey released this morning, Markit’s purchasing managers index, suggested that U.S. manufacturing was not only in expansion in September but also growing at the fastest pace in five months! Why are those two surveys saying different things?”

“For starters, they have different panel sizes, with Markit surveying more companies than the ISM. The ISM index also tends to cover larger companies and would therefore have been more impacted than Markit’s measure by the strike at General Motors during September, a temporary event in any case. But even assuming manufacturing is as bad as the ISM is suggesting, that would not necessarily mean the U.S. economy as a whole is in recession.”

“We’re still well above the 42.9 mark which even the ISM says “generally indicates an expansion of the overall economy”. So, while manufacturing woes are not good news, they do not preclude continued expansion of the U.S. economy.”