US Manufacturing Surveys Lift Concerns About Slowing Economy — Evening Brief – 09.03.24
In August, business activity in the US manufacturing sector continued to contract, albeit at a slower rate, with the Institute for Supply Management (ISM) Manufacturing PMI rising to 47.2% from 46.8% in July, slightly lower than the market expectation of 47.5% and lower than the contraction/expansion level of 50%. The manufacturing sector has experienced a fifth consecutive month of contraction, marking the 21st instance in the past 22 months.
“While still in contraction territory, U.S. manufacturing activity contracted slower compared to last month,” said Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee. “Demand continues to be weak, output declined, and inputs stayed accommodative.”
The overall economy, however, maintained its expansion for the 52nd consecutive month following a single month of contraction in April 2020, according to the ISM. According to Fiore, a manufacturing PMI above 42.5%, “over a period of time,” generally signals an expansion.
The PMI’s Employment Index increased to 46% from 43.4% in July, but the New Orders Index decreased to 44.6% from 47.4% in the same period, the fastest rate since June 2023. The Prices Paid Index, the report’s inflation component, increased to 54% from 52.9%, perhaps giving the Fed pause in evaluating the degree of the pending interest rate cut just over two weeks.
“The past relationship between the Manufacturing PMI and the overall economy indicates that the August reading corresponds to a change of plus-1.3% in real gross domestic product (GDP) on an annualized basis,” added Fiore.
Meanwhile, the final PMI reading from S&P for August, which indicated a decrease from 49.6 in July to 47.9, corroborated the ISM report.
“A further downward lurch in the PMI points to the manufacturing sector acting as an increased drag on the economy midway through the third quarter,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. “Forward looking indicators suggest this drag could intensify in the coming months.”
Despite the fact that the two surveys have historically diverged, there has been a clear consensus between the two since early summer: the US manufacturing sector is experiencing significant challenges.
Further deteriorating economic data increases the likelihood that the Federal Reserve will reduce interest rates by a minimum of 25 basis points at this month’s FOMC meeting, with the odds of a more aggressive 50-basis point cut up to 39% from 33% ahead of the ISM data.