U.S. manufacturing activity contracted for the first time in three years, according to the Institute for Supply Management’s August survey of manufacturing executives.
Today we’re going to take a look at four important takeaways from the ISM’s survey, including some of the comments provided by manufacturing executives.
U.S. manufacturing activity now stands at 49.1%, down 2.1% from July’s reading of 51.2%.
New orders, production and employment have all contracted, marking the first time since 2016 the ISM has recorded contraction in the sector.
Any reading below 50% indicates contraction.
Said Timothy Fiore, Chairman of the ISM: “Comments from the panel reflect a notable decease in business confidence. August saw the end of the PMI expansion that spanned 35 months, with steady expansion softening over the last four months. Demand contracted, with the New Orders Index contracting, the Customers’ Inventories Index recovering slightly from prior months and the Backlog of Orders Index contracting for the fourth straight month.”
Responses from August’s survey describe a climate of uncertainty as manufacturers grapple with multiple market influences, including a slowing economy, an ongoing trade war, and a hard Brexit.
Despite this, some manufacturers still reported strong business conditions.
The ISM’s reading coincides with the September 1st increase in tariffs on Chinese-made goods. The trade war with China continues to escalate, with China announcing that it will impose tariffs on $75 billion worth of U.S.-made goods. Making the list of items to be tariffed were agricultural goods, crude oil, aircraft, as well as U.S.-made automobiles and auto parts.
Fiore continued: “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.”
Of eighteen industries, only nine reported growth in August. Growth was seen in textile mills; furniture/related products; food processing and wood products.
Those recording contraction included apparel, leather & allied products; fabricated metals; transportation equipment and primary metals.
What U.S. Manufacturers Are Saying:
The ISM’s report included a sampling of responses from manufacturers, with some still pointing to strong business conditions – though somewhat muted.
Said one respondent in the plastics industry: “Current business is OK, nothing to brag about. Under projections and slightly below last year, [but] margins are hanging in there.”
Another in the chemical products industry noted: “While business is strong, there is an undercurrent of fear and alarm regarding the trade wars and a potential recession.”
Related: What U.S. Manufacturers Were Saying About Tariffs in 1930
Said another in computer & electronic products: “Seeing some relief in the availability of electronic components in the marketplace, but there are still pockets of short supply, allocation, long lead times and the like."
Manufacturers that do business with the U.K. are also eyeing developments there with concern. Says an executive in the miscellaneous manufacturing sector: “Generally business remains steady. However, we continue to plan for a hard Brexit and a long trade war between the U.S. and China.”
A slowdown in the transportation equipment sector has also put a damper on growth, with one respondent in that industry stating “Slowest month (July) this year so far in sales.”
New Orders Dive
The ISM’s New Orders Index sank to a contractionary reading of 47.2% in August, representing a decline of 3.6%. This is the first time new orders have contracted since December of 2015.
Eleven of eighteen industries reported contraction with apparel, leather & allied products; paper products; and wood products contracting the most. Says Fiore: “[Customer Demand] ended a 43-month expansion period in which it averaged 58.5 percent.”
Manufacturing Production Sinks
The ISM’s Production Index declined 1.3% in August to a current level of 49.5%. Apart from a surprise 2.8% increase in June, the Production Index has lagged over the past several months before finally falling into contraction
Lower production readings agree with August data released by the Federal Reserve, which found industrial output remains at a virtual standstill.
Nine of eighteen industries reported contraction in August, led by apparel, leather & allied products; paper products; petroleum & coal products; and transportation equipment.
Employment Contracts
Manufacturing employment, which has been in expansion mode for 43 consecutive months, has slid into contraction. The ISM’s employment index fell 4.3% in August to a current reading of 47.4%.
The U.S. Labor Department has reported growth in the U.S. manufacturing sector, though for the most part growth has been muted in 2019.
Nine out of eighteen industries reported a contraction in hiring, with wood products; printing & related support activities; and apparel, leather & allied products contracting the most.
Conclusion
The ISM’s manufacturing activity index covers a multitude of growth metrics. U.S. manufacturing activity has fallen into contraction for the first time in three years, after expanding solidly for 35 months.
New orders, production and employment all suffered sharp contractions in August.
Comments from manufacturing executives reflect continued concerns about the ongoing trade tensions with China, slowing business conditions and concerns over the economy.
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