The nation’s leading factory index in August contracted for the first time in three years as new orders, production and employment all fell below 50 -- the threshold between growth and contraction. The Institute for Supply Management’s PMI dropped to 49.1 percent last month, its lowest reading since 2016.
Business confidence has also declined as demand has essentially dried up, said Tim Fiore, ISM’s chair for manufacturing surveys. New orders fell 3.6 percent to 47.2; production dropped 1.3 percent to 49.5; and employment fell 4.3 percentage points to 47.4.
New export orders experienced the biggest drop—4.8 percent—to a level of 43.3.
Nine of 18 industries tracked by the ISM contracted in August. Electronics and chemicals – two industries heavily dependent on exports – are no longer leading manufacturing expansion, Fiore said.
While electronics is seeing some relief in the availability of electronic components in the marketplace, a tech executive said, there are still pockets of short supply, allocation and long lead times. “Tariffs continue to be a strain on the supply chain and the economy overall,” the executive added.
Trade remains the most significant issue for U.S. factories, indicated by the strong contraction in new export orders. Manufacturers also expressed a higher level of concern in August over the U.S.-China tariff dispute. “Respondents continued to note supply chain adjustments as a result of moving manufacturing from China,” said Fiore.
Certain elements of the supply chain, such as the location of factories, are not easily altered. Many manufacturers are putting off expansion or relocation decisions because of trade uncertainties. “While business is strong, there is an undercurrent of fear and alarm regarding the trade wars and a potential recession,” a purchasing executive told the ISM. Business investment is at a standstill due to trade disputes and Brexit.
Contraction in the manufacturing sector has always preceded a recession, according to the ISM. The last time the PMI and its sub-indexes faced such a “perfect storm” of negative growth was in 2008, said Fiore “Manufacturing is already in contraction – the only question is when does the rest of the economy follow?” he said.
Overall, consumption -- as measured by the production and employment indexes -- contracted at higher levels in August, contributing to a combined 5.6 percentage point decrease to the PMI. Inputs — expressed as supplier deliveries, inventories and imports — were lower for the third straight month due to inventory tightening and slower supplier deliveries. Inputs provided the only two positive signs for future expansion: supply chains are responding better to demand, and companies are matching inventories to new orders.
- Supplier deliveries registered 51.4 percent, a 1.9-percentage point decrease from July
- Inventories reached 49.9 percent, an increase of 0.4 percentage point from July
- Prices registered 46 percent, a 0.9-percentage point increase from July
- Imports declined by 1 percentage point to 46.0
- Backlog increased 3.2 percentage points from July, to 46.3
“I don’t think anything happens until new orders come back,” Fiore concluded. “The PMI is usually a 6-month leading indicator for the rest of the economy.”
The ISM was founded in 1915 as the first supply management institute in the world. Its reports on business have been issued monthly since 1931, except for a four-year interruption during World War II.