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Data releases on Tuesday pointed to a weakening in the U.S. manufacturing and building sectors.

The Institute for Supply Management's manufacturing index fell to 49.1 in August, below the level of 50, "signaling the U.S. manufacturing sector contracted last month after expanding for 35 consecutive months," said Scott Anderson, chief economist at Bank of the West. "The ISM manufacturing index is now at the lowest level since January 2016. A slowing global economy and the U.S.-China trade dispute is increasingly weighing on the manufacturing sector, and we believe the weakness will spread to the broader U.S. economy and lead to slower U.S. GDP growth. U.S. construction spending also remains weak."

The ISM's report showed economic activity in the manufacturing sector contracted, even as the overall economy grew for the 124th consecutive month in August. PMI fell from 51.2 in July. IFR Markets economists had expected a reading of 50.6.

“The new orders index registered 47.2%, a decrease of 3.6 percentage points from the July reading of 50.8%," said Timothy Fiore, chair of ISM’s Manufacturing Business Survey Committee. "The production index registered 49.5%, a 1.3-percentage point decrease compared to the July reading of 50.8%. The employment index registered 47.4%, a decrease of 4.3 percentage points from the July reading of 51.7%. The supplier deliveries index registered 51.4%, a 1.9-percentage point decrease from the July reading of 53.3%. The inventories index registered 49.9%, an increase of 0.4 of a percentage point from the July reading of 49.5%. The prices index registered 46%, a 0.9-percentage point increase from the July reading of 45.1%.

The Sino-U.S. trade dispute was cited by some respondents as a cause for concern.

"Respondents expressed slightly more concern about U.S.-China trade turbulence, but trade remains the most significant issue, indicated by the strong contraction in new export orders,” Fiore said. “Respondents continued to note supply chain adjustments as a result of moving manufacturing from China. Overall, sentiment this month declined and reached its lowest level in 2019.”
Anderson said that the trade war heated up over the weekend.

"China’s Commerce Ministry announced over the Labor Day weekend it will file a lawsuit against the U.S. on the tariffs levied on $300 billion of Chinese exports," Anderson said. "The U.S. imposed a 15% tariff on Sept. 1 on about $112 billion of Chinese goods with a second round planned for Dec. 15 on the remaining exports. The U.S. has 60 days to settle the legal case, which is the third lawsuit filed by China against the U.S.-imposed tariffs."

Another key gauge of U.S. manufacturing activity signaled a further slowdown in growth in August, as IHS Markit’s Manufacturing Purchasing Managers’ Index fell to its lowest level in almost a decade. The seasonally adjusted IHS Markit PMI hit 50.3 in August, down from 50.4 in July, the firm said in a report Tuesday. IFR economists had forecast a reading of 49.7.

“As such, the latest reading signaled the least marked improvement in the health of the U.S manufacturing sector since the depths of the financial crisis in September 2009,” IHS Markit said in a news release.

The headline figure was weighed on by an uptick in production and lackluster client demand, IHS Markit said, adding that falling orders among foreign clients dragged on overall new business growth and producer confidence.

"The August PMI indicates that U.S. manufacturers are enduring a torrid summer, with the main survey gauge down to its lowest since the depths of the financial crisis in 2009,” said Chris Williamson, IHS Markit’s chief business economist. “Output and order book indices are both among the lowest seen for a decade, indicating that manufacturing is likely to have again acted as a significant drag on the economy in the third quarter, dampening GDP growth. At current levels, the survey indicates that manufacturing production is falling at an annualized rate of approximately 3%.”

The degree of optimism about the year ahead also hit a fresh seven-year series low amid growing business uncertainty, IHS Markit said.

“As such, employment was broadly unchanged and spare capacity was used to clear backlogs of work. Meanwhile, inflationary pressures eased further, with rates of input price and output charge inflation among the slowest for almost three years,” the report said.

Companies were hesitant to hire new workers in August, as employment levels remained nearly unchanged during the month. IHS Markit did say, however, that some firms responding to the survey said they weren’t hiring in part due to difficulties in finding suitable candidates.

“Hiring has stalled as companies worry about the outlook: optimism about the year ahead is at its lowest since comparable data were first available in 2012. Similarly, price pressures are close to a three-year low, as crumbling demand has removed firms’ pricing power.”

Also, Tuesday, the Commerce Department reported that construction spending rose 0.1% in July after falling a revised 0.7%, originally reported as a 1.3% decline. IFR economists had expected construction spending to have risen by 0.6% in July.

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