- The ISM manufacturing index declined to 49.1 in August from 51.2 in July, undershooting consensus expectations for a near-steady reading of 51.3. This is the first contraction in the headline composite index since August 2016.
- The decline was broad-based, with four of five of the subcomponents contracting in August. Employment registered the largest move lower (-4.3 to 47.4), followed by new orders (-3.6 to 47.2), and production (-1.3 to 49.5). Supplier deliveries declined 1.9 points to 51.4, signaling an expansion but at a slower pace. Inventories contracted at a slower pace in the month (+0.4 to 49.9).
- Prices paid improved (+0.9 to 46) following two consecutive months of declines. Nevertheless, manufacturing prices paid have contracted for three consecutive months, with August’s contraction driven by lower energy and industrial metals prices.
- Both trade indexes deteriorated last month. New export orders fell more (-4.8 to 43.3) than import orders (-1 to 46), and both indexes are sitting firmly in contractionary territory.
- Of the 18 manufacturing industries, half reported growth in August. Seven reported a contraction, while two reported no change.
Key Implications
- This was a very weak report. The headline index, production, employment and new orders all fell into contraction in August after teetering on the brink in the months prior. Weaker prices further reinforce the view that demand for U.S. manufactured goods is at its weakest in three years. Trade remained the most significant issue, evidenced by a worsening in export and import orders. Respondents cited slowing sales, an undercurrent of “fear and alarm” about trade tensions and recession risk as key issues.
- Surveys released this week indicate that global manufacturing sentiment is the most negative it’s been since 2016, with manufacturing in much of the world in contraction. The one-two punch of weak foreign demand and escalating trade tensions with China is likely to continue to weigh on U.S. manufacturing activity through the end of the year. Tariffs imposed on Sunday are the latest salvo in a trade conflict with little sign of abating anytime soon. Looking ahead, U.S. manufacturers will likely continue to face an extended period of trade policy uncertainty coupled with wavering domestic demand and little improvement in foreign demand conditions. The key question is whether the woes of the manufacturing sector will spillover and takedown the thus far stalwart U.S. consumer.
