It’s difficult not to be concerned over recent economic indicators and the stock market’s roller coaster ride, but the Institute for Supply Management, which tracks U.S. manufacturing activity, notes that domestic production expanded in August for the 75th consecutive month. Unfortunately, that expansion was at the slowest rate the country has seen since May 2013.
The ISM’s leading index, the PMI, fell to 51.1 percent from 52.7 percent in July, marking the lowest reading since May 2013. The PMI’s sub-indexes followed suit: new orders fell to 51.7 from 56.5; the prices paid index fell to 39.0 from 44.0; the employment index slipped to 51.2 from 52.7; and the imports index hit its lowest level since January 2013 at 51.5 percent. A reading above 50 indicates expansion; a reading below 50 indicates contraction.
However, noted Brad Holcomb, chair of the ISM’s Manufacturing Business Survey Committee, the PMI’s average, year to date for 2015, is 52.4 percent. “In August, we were only 1.3 percentage points below that average. We see that as a continuation of a modest growth year to this point,” he said. The year is below the manufacturer and analyst expectations that were cited in December, he added, and the impact of a harsh winter, U.S. West Coast port strikes, the strong dollar and the Chinese economy can’t be discounted. “Some of these have an indirect impact on the PMI and some are emotional, but what [the U.S. manufacturing sector] has been experiencing all year is modest growth.”
Of the 18 industries that make up the ISM index, computer and electronic products – one of the largest manufacturing sectors – was one of six that contracted last month. Nevertheless, the industry remains positive: “FX [Foreign Exchange] continues to be a challenge, especially in Europe,” one manager told the ISM. “Overall though, the mood is fairly upbeat regarding H2 [second half of 2015] as we ramp up for a new product launch.”
However, the specter of China looms large. Activity in China’s factory sector shrank at its fastest rate in at least three years in August, according to CNBC. China’s services sector, which has been one of the lone bright spots in the sputtering economy, also showed signs of cooling. According to CNBC:
Hurt by soft demand, overcapacity and falling investment, the [China] economy has also been buffeted by plunging shares and a shock yuan devaluation, in what some have called a “perfect storm” of factors that is rattling global markets and could strain relations with China’s major trading partners.
China’s official manufacturing Purchasing Managers’ Index (PMI) fell to 49.7 in August from 50.0 in July, the National Bureau of Statistics said on Tuesday. That was in line with a Reuters poll but the lowest since August 2012, and below the 50-point mark separating growth from contraction.
New orders – a proxy for domestic and foreign demand – fell to 49.7 in August from July’s 49.9. New export orders contracted for an 11th straight month.
Comments from other U.S. purchasing managers were mixed for the month, ISM’s Holcomb said: while low oil prices are hurting manufacturers in petroleum and coal products, they are also driving lower raw materials prices and factory energy costs and benefitting other sectors. “The stronger dollar is implied in a couple of areas as a concern and China is called out as a lackluster market,” Holcomb added. “But overall the comments are interesting and more positive in looking forward.” A manager in the machinery business told the ISM that automotive companies are investing heavily in upgrading their equipment, for example.
Two data points to keep an eye on, Holcomb added, were customer inventories, which at 53.0 – up 9 percentage points –is the highest level since 2009. “There are more finished goods on the shelf than we would like to see, and that might temper new orders,” Holcomb explained. Exports –which contracted by 1.5 percentage points to 46.5 percent—is also something to watch, he said.
Of 18 manufacturing industries, 10 reported growth August in the following order: textile mills; furniture and related products; paper products; nonmetallic mineral products; chemical products; food, beverage and tobacco products; miscellaneous manufacturing; fabricated metal products; plastics and rubber products; and machinery. Six industries reported contraction in August — listed in order: apparel, leather and allied products; primary metals; electrical equipment, appliances and components; petroleum and coal products; computer and electronic products; and transportation equipment.