The Institute for Supply Management’s manufacturing index, the PMI, increased by 0.4 percent in August, but at a level of 47.2 remained below the index’s growth threshold of 50.0.
Demand slipped further into contraction, declining by 2.8 percent to 44.6, and manufacturers paid more for their materials last month. The ISM prices index grew by 1.1 percent to 54.0. At the same time. production decreased by 1.1 percent to 44.8, signaling manufacturers’ adjustments to soft demand. This is the PMI’s fifth month of contraction.
“Demand is nowhere to be found,” said Tim Fiore, chair of the ISM’s manufacturing survey committee. “Production came down and it has steadily been creeping down in a controlled manner in response to demand signals.”
Nevertheless, two industries expanded last month, including computers and electronics. “Business outlook is good,” according to one tech executive. “Recovery from the electronics slowdown is strong for the second half of the year.”
But the ISM does not expect manufacturing will move all that much in the next several months. Uncertainly regarding the Fed’s plan for interest rates and the U.S. presidential election has ground a lot of activity to a halt.
“Demand remains subdued, as companies show an unwillingness to invest in capital and inventory due to current federal monetary policy and election uncertainty,” said Fiore. “Production execution was down compared to July, putting additional pressure on profitability. Suppliers continue to have capacity, with lead times improving and shortages not as severe,” he added.
No matter which way the election goes, noted the IPC’s Chief Economist Shawn DuBravac, “you’ll have a new president and a new vice president and they’ll bring with them their teams and their policies. I do think that we’re waiting for some of that. Recent volatility in the marketplace doesn’t help and again, I think that is going to last through at least the first part of November when we have the election, and so at this point I think it makes a lot of sense to wait.”
Manufacturers’ inventories grew by 5.8 percent to 50.3 in August. Customers’ inventories registered 48.4 percent in August, up 2.6 percentage points compared with 45.8 percent reported in July. “Customers’ inventory levels decreased at a slower rate in August, with the index moving upward to approach the lower end of ‘just right’ territory,” Fiore explained. “This means panelists are reporting their companies’ customers have adequate or just right amounts of their products in inventory compared to the previous month, suggesting a demand level that is typically neutral for future new orders and production.”
“While still in contraction territory, U.S. manufacturing activity contracted slower compared to last month,” he continued. “Demand continues to be weak, output declined, and inputs stayed accommodative. Demand slowing was reflected by the new orders index dropping further into contraction; new export orders index contracting slightly faster; backlog of orders index remaining in strong contraction territory; and customers’ inventories index at the ‘just right’ level.”
New export orders declined by 0.4 percent to a level of 48.6.
Output (measured by the production and employment indexes) continued in moderate contraction with production sagging further, while employment contracted slower as compared to July. Panelists’ companies reduced production levels month over month as head-count reductions continued in August. Inputs — defined as supplier deliveries, inventories, prices and imports — generally continued to accommodate future demand growth, with inventory growth attributed to a supply demand timing mismatch, Fiore added.
“Suppliers continue to have capacity, with lead times improving and shortages not as severe,” Fiore concluded. And several fundamentals improved. Sixty-five percent of manufacturing gross domestic product (GDP) contracted in August, down from 86 percent in July. The share of manufacturing sector GDP registering a composite PMI calculation at or below 45 percent (a good barometer of overall manufacturing weakness) was 33 percent in August, a 20-percentage point improvement compared with 53 percent reported in July.
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