PMI Up, Demand Down: Oct 11 ISM Hails “Stability” While 28% of Manufacturing Slips into Strong Contraction

On 2025-10-11, the ISM manufacturing release handed investors a feel-good headline — the PMI ticked up 0.4 to 49.1. The problem: the guts of the report say demand is eroding. New Orders slid back into contraction at 48.9 (down 2.5), New Export Orders plunged to 43.0 (down 4.6), and Imports fell to 44.7 (down 1.3). Meanwhile, the share of sector GDP in strong contraction (≤45) exploded to 28% from 4%. Call it what you want. “Stability” isn’t it.

- Headline PMI: 49.1 (+0.4) — marginal uptick, still in contraction.
- Demand deteriorated: New Orders 48.9 (-2.5), New Export Orders 43.0 (-4.6), Imports 44.7 (-1.3).
- Production 51.0 (+3.2) vs Backlog 46.2 and Inventories 47.7 — output rising into weak orders = inventory risk.
- Broad weakness: 11 of 18 industries contracted; only 1 of the six largest expanded (Petroleum & Coal). 28% of sector GDP now in strong contraction (≤45).
- Prices 61.9 (-1.8) — slower, but still elevated with tariff surcharges up to 20% and widespread cost pass-throughs.

Headline vs Demand: The Split That Matters
A higher PMI with weaker orders is the kind of divergence that precedes disappointment, not recovery. The New Orders Index at 48.9 rolled back below 50, and New Export Orders at 43.0 signal accelerating global weakness. Imports at 44.7 confirm soft domestic demand and/or active sourcing cutbacks. This is not a new-downturn story; it’s a deeper-trough story.

Output Without Orders: Inventory Misalignment
Manufacturers revved output to 51.0 (+3.2) even as orders contracted and Backlogs stayed recessionary at 46.2 (36th straight month). Inventories fell to 47.7, accelerating contraction — a nod to caution — yet producing into a weakening demand tape sets up late-quarter write-downs and discounting. That’s margin compression territory.

Breadth Worsened Behind the PMI
Yes, ISM says the share of sector GDP in contraction dipped to 67% from 69%. But the quality of that contraction deteriorated: “strongly contracting” GDP share surged to 28% from 4% in a month. Only 5 industries grew while 11 contracted; among the six heavyweights, only Petroleum & Coal Products expanded. Stabilization? Not in the places that drive cycle turns.

Inflation: Downplayed, Not Defeated
The Prices Index at 61.9 remains firmly in “increasing” territory despite a -1.8 deceleration. Respondents flag tariff-driven documentation delays, “derivative steel and aluminum” penalties, surcharges up to 20%, and broad MRO cost creep. Several describe stagflation-like conditions: prices up, orders down. That’s not an easing backdrop for margins or for the Fed.

Supplier Deliveries: Not the Good Kind of Slow
Supplier Deliveries rose to 52.6, which the report frames as “typical as the economy improves.” Respondents disagree, citing tariff frictions and border holds — supply impediments, not demand strength. Treating policy-created bottlenecks as a bullish signal is narrative gymnastics.

The Restocking Mirage
Customers’ Inventories remained “too low” at 43.7 for the 12th month. If that were reliably predictive, New Orders would not be sliding. Twelve months of “too low” without demand follow-through means the restocking thesis is still a mirage — and management teams know it.

Monthly Trends Snapshot

Narrative Drift vs Reality
- “Overall economy expanding for the 65th month” is small comfort when manufacturing has contracted for seven straight months, and 28% of sector GDP is now in strong contraction.
- “Production back in expansion” rings hollow when Employment at 45.3 shows ongoing headcount management; output increases without hiring, amid falling orders, are short-lived.
- “Backlog improved” from 44.7 to 46.2, but after 36 consecutive months of contraction, that “improvement” is statistical noise, not a trend.
- “Slower deliveries typical as demand improves” is contradicted by tariff and documentation delays — policy friction, not boom-time congestion.

Market Implications
- Equities:
- Prefer balance-sheet quality and proven pricing power in Industrials; avoid deep cyclicals tied to exports and heavy machinery where respondents report layoffs and project deferrals.
- Among large industries, Petroleum & Coal Products is the lone grower; energy-linked supply resilience and cash generation remain relative havens.
- Credit:
- Inventory misalignment and weaker orders raise downgrade/negative outlook risk for lower-quality manufacturers. Watch accounts payable stretch and revolver usage.
- Rates/Macro:
- The combo of weak demand and Prices at 61.9 is a stagflation-lite signal. Expect choppy duration trades: growth softens the long end, sticky prices cap rallies.
- FX/Trade:
- Exports at 43.0 spotlight foreign demand erosion; global cyclicals with eurozone/Asia exposure face headline risk and earnings downgrades.
- Supply Chain/Logistics:
- Tariff/documentation delays extend cycle times and working capital. Companies with diversified sourcing and tariff-aware procurement keep a margin edge.

Looking Ahead
- Watch if New Orders remains below 50 next month; a second print confirms the relapse.
- Track Prices: staying north of 60 prolongs margin pressure and complicates policy expectations.
- Monitor Customers’ Inventories: if “too low” persists without orders, the restocking story is officially broken.
- Exports are the swing factor: a rebound from 43.0 would meaningfully improve the outlook; absent that, expect more production pullbacks.
- Policy watch: any shift on tariffs or border documentation could quickly tighten Supplier Deliveries for the right reasons — or ease them for the wrong ones.

Conclusion
The 2025-10-11 ISM release dresses up a contraction as stabilization. The numbers disagree. PMI up to 49.1 is overshadowed by New Orders at 48.9, Exports at 43.0, Employment at 45.3, and a spike in strongly contracting GDP share to 28%. Prices at 61.9 keep the inflation ember alive while tariffs impose a tax on time and margins.