Core Summary

  • The Institute for Supply Management (ISM) said Tuesday that U.S. manufacturing remained in contraction territory last month, dragged down by declines in production, new orders, supplier deliveries, and export orders.
  • The ISM manufacturing index rose 0.4 percentage points month-over-month to 47.2% in August, but the reading remains below 50,indicating the sector is still contracting. According to ISM, the industry has contracted for five consecutive months.
  • "Demand remains weak, and companies are reluctant to invest in capital and inventory due to current federal monetary policy and election uncertainty," said Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, in a statement.

In-Depth Analysis

Facing declining demand, manufacturers cut production in August for the first time in six months. S&P Global's U.S. manufacturing PMI report, released Tuesday, corroborates this trend.

"The further decline in the PMI indicates that manufacturing is acting as a greater drag on the economy in the middle of the third quarter," said Chris Williamson, chief business economist at S&P Global, in a statement.

Williamson noted that due to unexpectedly slower sales, manufacturers' warehouses are piled with unsold inventory, and theycut production for the first time since January. At the same time, companies are also reducing their workforce and scaling back raw material purchases.

"The combination of falling orders and rising inventories sends the most pessimistic forward-looking signal for production trends in the past year and a half, and is one of the most concerning signals since the global financial crisis," he said.

Following the release of the manufacturing data, the Federal Reserve Bank of Atlantalowered its estimate for third-quarter economic growth, from an annualized rate of 2.5% to 2%.

Although manufacturing accounts for only11%of U.S. economic growth, it serves as an engine for expansion in related industries and provides guidance for the overall economic trajectory.

Fiore said the ISM manufacturing index reading last month suggests the U.S. economy may be growing at an annualized rate of only 1.3%.

Fiore also noted that although inflation has moderated since the first quarter, it remains a headwind for the economy. Citing the sub-index measuring price trends in the manufacturing index, he said: "The August price index showed a faster pace of expansion compared to the previous month. Commodity prices continue to be volatile, especially for oil, natural gas, aluminum, corrugated cardboard, freight, and plastic resins."

Meanwhile, the employment index rose 2.6 percentage points, indicating an improved outlook for manufacturing workers.

However, the S&P Global index sent a pessimistic signal for workers' prospects, noting a decline in employment in August. Williamson said producers "are cutting jobs for the first time this year and reducing purchasing inputs due to concerns about overcapacity."

U.S. stocks fell following the disappointing manufacturing data, with the S&P 500 dropping 2.1%.