Implications: Activity in the manufacturing sector continued expanding in September, although at a slightly slower pace than the previous month.  Despite this being the second consecutive decline in the headline index, the 54.5 reading for the ISM Manufacturing index marks the third-fastest pace since 2022.  Activity has now expanded for nine consecutive months, an encouraging development for an industry that has faced significant challenges in recent years, and which now appears to be benefitting from AI-related capital investment, the reshoring of production, and increased defense procurement.  Looking at the details of the report, twelve out of the eighteen major manufacturing industries reported growth in September, with only two industries reporting contraction (Printing and Textile Mills), and four reporting no change. The major measures of activity were mixed for the month, but all stand above 50, signaling growth. New orders picked up in September, which (until this year) had been very weak going back to 2023, leaving many manufacturers focused on order backlogs to keep production going.  So, it’s good to see that along with the rise in new orders (currently sitting at 55.3), order backlogs have grown each month in 2026 after more than three straight years in contraction and now sit at a seven-month high of 56.4.  The best news in the report is that the improvement in demand has finally convinced manufacturers to start adding workers, with the employment index staying in expansion territory for the third month in a row, rising to 52.7, after nearly three straight years of contraction. The worst news in the report is that inflation pressures accelerated in September, rising to 77.9 after stabilizing in the low 70s in previous months.  The report notes that the prices index has been driven by (1) increases in steel and aluminum prices that impact the entire value chain, (2) tariffs applied to imported goods and (3) increases in petroleum-based products as a result of the Middle East conflict.  This further strengthens our expectation for the Federal Reserve to hike short term interest rates at the meeting in December (skipping action at this month’s meeting), but the below-trend growth in the M2 money supply suggests inflation will come down faster than most investors expect on the other side of the Iran War.  In other news this morning, construction spending increased 0.9% in August, as large increases for homebuilding and office construction more than offset a decline in other commercial projects. On the employment front, initial jobless claims last week ticked down by 1,000 to 197,000; continuing claims declined 11,000 to 1.701 million.

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