- The trade war and its tariffs have taken steam out of the global manufacturing sector, and data for U.S. manufacturing is expected to continue to be weak.
- After ISM manufacturing contracted for the August and September, markets are paying close attention to all manufacturing-related data like Thursday's durable goods reports and Markit manufacturing PMI.
- Economists expect durable goods for September to drop by 0.8%, according to Dow Jones, but the number is expected to be clouded by the GM strike and Boeing's 737 Max issues.
Thursday's economic calendar contains several reports that could shed more light on how much the manufacturing sector is slowing down, and whether its weakness will spill over onto the services sector and the consumer.
Durable goods are expected at 8:30 a.m. ET Thursday, and economists expect to see a dip of 0.8% in September, after a gain of 0.2% in August, according to Dow Jones. There is also Markit's PMI data for manufacturing and services, both at 9:45 a.m.
These reports come after September ISM manufacturing data showed a surprise decline to 47.8%, the lowest since June 2009 and the second month of contraction. New orders slumped to 41%, the lowest since March, 2009.
Markit PMI manufacturing data did not show a contraction for September, and economists expect the flash number for October to show a slight slowdown to 50.7, from 51. A number above 50 continues to show expansion. Markit flash services PMI is also expected to show expansion at 50.8.
"The channel we've been monitoring is that trade matters for manufacturing, and manufacturing matters for corporate profits. Even though manufacturing is a small share of the overall economy, it's still a large share of the volatility in the economy," said Don Rissmiller, Strategas Research chief economist. Rissmiller said the slowing in U.S. manufacturing is tracking the slowdown in manufacturing in other parts of the world, like Germany.
Boeing's problems with its grounded 737 MAX airlines could muddy the durable goods report.
"In durables, the issue is normally ... aircraft orders," said Tom Simons, money market economist at Jefferies. "It tends to be what swings the headline number. Here you're probably going to have the pendulum swing, after last month. It's going to be a drag."
Simons said he is also watching the capital goods, non-defense, ex-aircraft orders and shipments, which are a direct reflection of business spending inside the durable goods report. The future reading of orders fell by 0.2% in last month's data, while shipments reflecting past activity, rose by 0.4%.
"In the long run, there is decent demand for different types of machinery. There's a lot of manufacturing businesses that need equipment that are not as sensitive to tariffs as others, but the tariff sensitive businesses are dominating the data and there's a lot of things that are clouding everything," Simons said.
Grant Thornton chief economist Diane Swonk said the durables reports has a number of factors impacting it. "You're going to have some spillover effect from the GM strike and the trade uncertainty. You have a lot of things going against us on durables. You have the 737 Max out of the equation, so it's going to be a boulder up hill at this point in time," she said.
Simons said he has also been encouraged by a pickup in regional Fed manufacturing data. And he does not expect the manufacturing weakness to spill over into the services sector data. Hiring remains strong, and so does the consumer.
"I think we'll see divergent data tomorrow," he said.