The Institute for Supply Management (ISM) manufacturing index rose 2.5 points to 58.8 in August, marking a twelfth consecutive monthly expansion and nearing the cycle high. The reading came in well above the consensus view, which called for only a modest improvement to 56.5.
Most subcomponents improved on the month, with inventories (+5.5 to 55.5) and employment (+4.7 to 59.9) leading the way.
Production (+0.4 to 61) improved slightly, new orders (-0.1 to 60.3) remained relatively steady, while the backlog of orders improved 2.5 points to 57.5 – matching a March cycle high.
Given little movement in new orders and a surge in inventories, the spread between the two – useful as a leading indicator of activity – was cut in half, but at 4.8 still remains supportive of future growth, albeit slower, in the sector.
The biggest pullback was recorded in customers’ inventories which fell 8 points to 41 – bringing the index back to 2011 levels. At the same time, trade indicators edged lower, with exports falling another 2 points in August, while imports reversed part of last month’s gain (-1.5). Nonetheless, both remain within the 55-point range, indicating decent growth in trade activity.
The prices paid subcomponent held steady at 62 – widening the gap from year-ago levels to 9 points from 7 points previously.
Fourteen of the eighteen industries reported expansion in August, with Textile Mills, Petroleum & Coal Products, and Machinery registering the strongest expansions on the month.
Key Implications
Results from today’s ISM survey confirm that the U.S. manufacturing sector continues to expand at a robust clip. The details of the report provide further comfort as nearly all of the subindices, except customers’ inventories, remain in healthy territory. At the same time, most industries recorded an expansion on the month, while comments from the survey respondents remained broadly positive.
In the near term, the sector is likely to go through some volatility given the effects of Hurricane Harvey on Southeast Texas. The affected area is home to a large concentration of the refining and chemical industry, with the pause in activity expected to weigh on the sector, and on nondurable goods manufacturing as a whole. As the aforementioned industries return to full capacity, we expect to see a boost in manufacturing activity in the following quarter. Meanwhile, cleanup and reconstruction efforts are likely to deliver an added boost to manufacturing in subsequent quarters.
Overall, we remain optimistic about manufacturing’s prospects over the medium term, given improving global growth and a weaker U.S. dollar – with the greenback giving back more than its post-election gains. That said, this narrative will require a stable political backdrop and more certainty as far as trade agreements go – both factors that could weigh on prospects.
