ISM Manufacturing Purchasing Managers Index Points to Further Weakness

By Robert Hughes

The Manufacturing Purchasing Managers Index from the Institute for Supply Management fell below neutral for the first time in almost three years, registering a 49.1 percent reading in August, down 2.1 points from 51.2 in July. The index is at the lowest reading since January 2016 (see top chart). However, August is the 124th month above the 42.9 percent threshold consistent with expansion in the overall economy. Comments from purchasing executives highlight international concerns including trade wars and rising tariffs, signs of slowing global growth, and Brexit, along with increased uncertainty regarding the U.S. economy, as significant issues.

Among the key components of the Purchasing Managers Index, the New Orders Index dropped 3.6 points to 47.2, the lowest reading since April 2009 during the Great Recession. The weak reading suggests a significant deceleration in demand (see top chart). New export orders fell 4.8 points to 43.3, also the lowest reading since the recession. The backlog of unfilled orders increased 3.2 points but remained below neutral for the fourth consecutive month, posting a 46.3 reading in August.

The production index fell to 49.5 percent in August, down from 50.8 in July. Historically, readings above 51.7 are consistent with growth in the industrial-production index from the Fed, suggesting industrial output may have declined last month. In August, four industries surveyed reported growth while nine reported a decrease in production.

The employment index decreased to 47.4 percent in August, down from 51.7 in July (see bottom chart). The below-neutral result suggests employment in manufacturing may have decreased in August. The Bureau of Labor Statistics’ Employment Situation report for August is due out on Friday, September 6. Consensus expectations are for 159,000 new nonfarm-payroll jobs including 8,000 new jobs in manufacturing. Payroll processor ADP will release its estimate for private payrolls for August on Thursday, September 5.

Supplier deliveries, a measure of delivery times from suppliers to manufacturers, came in at 51.4, down from 53.3 in July. August was the 42nd consecutive month above 50, and the results suggest suppliers delivering to manufacturers are still falling behind but at a slower pace.

The prices index eased again, posting the third monthly reading below 50. The index rose 0.9 percentage points to 46.0 in August from 45.1 in July. The three-month run is the longest stretch below neutral since the period November 2014 through February 2016. These results suggest manufacturers are experiencing less materials-costs pressure. Some inputs may still be impacted by higher tariffs.

Customer inventories in August are still considered too low, with the index falling to 44.9 from 45.7 in the prior month (index results below 50 indicate customers’ inventories are too low, considered a positive sign for future production). The index has been below neutral for 35 consecutive months and is one of the few positive points in the report.

Today’s report from the Institute for Supply Management suggests the manufacturing sector may have contracted in August and extends the current period of weakness for American factories. The report highlights the growing negative impact of poor trade policy on business confidence and adds support for a more cautious outlook.

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Robert Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.