The timing couldn’t be worse—amidst a climate of political gamesmanship with U.S. trading partner Mexico, U.S. manufacturing activity in August contracted for the first time in five months. The Institute for Supply Management’s (ISM) index of national factory activity, the PMI, fell 3.2 percentage points to a reading of 49.4 last month. A reading below 50 indicates contraction in manufacturing; a reading above 50 indicates expansion.
The PMI and its subindexes had been rebounding slowly following a lackluster Q1; the PMI last contracted in February. “[August’s reading] is a surprise and is unexpected because most, if not all, of the forecasts I’ve seen have been positive and we ourselves are coming off a five-month expansion,” said Brad Holcomb, chair of the ISM Manufacturing Business Survey Committee. Bloomberg Business concurred:
Traders were taken aback by weak manufacturing data considering that other reports pointed to an economy that is bouncing back on the heels of still-robust consumer spending and progress in paring inventories. While investors digest those mixed figures, they await employment data due Friday for clues on the path of borrowing costs. Traders assign a 34 percent chance the Federal Reserve will boost rates this month, up from 18 percent in the beginning of August, according to fed fund futures data compiled by Bloomberg.
All the ISM’s subindexes also declined in August. New orders registered 49.1 percent, a decrease of 7.8 percentage points from the July reading of 56.9 percent. The production index registered 49.6 percent, 5.8 percentage points lower than July’s reading of 55.4 percent. The employment index registered 48.3 percent, a 1.1 percent decrease from the prior month. Among August’s mixed messages was a comment from a plastics and rubber products executive who said it’s hard to find production associates. “Unemployment in the area is around 4 percent,” the executive added, “and we can’t get enough employees [which] leads to lot of overtime.”
Inventories of raw materials decreased by 0.5 percent in August to 49; and the ISM’s prices index registered 53 percent, a decrease of 2 percentage points from the July reading of 55 percent, indicating higher raw materials prices for the sixth consecutive month. “Prices are behaving themselves,” Holcomb pointed out, “they are increasing but at a slower rate.”
New exports, although flat in August, remain in positive territory at 52.5 percent. “That’s showing that there continues to be demand from overseas, while the new orders number suggests weaker domestic demand,” Holcomb said. (According to the Office of the U.S. Trade Representative, Mexico is the third largest trading partner of the U.S.: exports to Mexico totaled $236 billion in 2015.)
“I can’t detect any particular theme or reason for the one-month [U.S. manufacturing] blip,” Holcomb added. In fact, the ISM’s largest industry, computer and electronic component manufacturers, was one of six industries reporting growth last month; and the overall economy continues to grow—August was the 87th straight month of expansion. But external factors such as weather have impacted the supply chain before. "August was hot as blazes," Holcomb said; "there was tragic flooding; we still have this interesting presidential race going on; or maybe people were watching the Olympics. I don’t know if this is only a one-month trend, but it is interesting.”
Of the 18 manufacturing industries followed by the ISM, six are reporting growth in August in the following order: printing and related support activities; nonmetallic mineral products; computer and electronic products; miscellaneous manufacturing; food, beverage and tobacco products; and chemical products.