U.S. Factory Activity Outperforms August Projections

U.S. factory activity in August expanded at its fastest rate since 2018, driven by a surge in demand and shrinking levels of customer inventory.

The Institute for Supply Management’s PMI rose 1.8 percent to 56 percent in August, compared with 54.2 percent in July. This is the third month of manufacturing expansion since April’s contraction, which ended 131 months of consecutive growth.

A level over 50 indicates expansion; a number below 50 signals contraction. August was the first full month of operations after supply chains restarted and adjustments were made for employees to return to work. New orders reached 67.6, up 6.1 percent from the prior month, reaching its highest level since January 2004.

“This was a pleasant surprise,” said Tim Fiore, chair of the ISM’s manufacturing survey committee, after the coronavirus brought manufacturing activity to historic lows. “It was high on the demand side and the supporting indexes were positive -- and not marginally positive. New orders were surprisingly strong and August is usually not a big manufacturing month. New exports were up and customer inventory is low, which looks good for the future.”

Production registered 63.3 percent, up 1.2 percent from 62.1 in July; backlog increased 2.8 percent to 54.6. Customer inventories declined 3.5 percent to 38 from 41.6 percent in July. The PMI surpassed nearly every estimate in a Bloomberg survey of economists and the median projection of 54.8.

Inputs — expressed as supplier deliveries, inventories and imports — were flat during July due to supplier bottlenecks returning and import levels expanding moderately. [Factory] inventory levels contracted again due to strong production output and challenges in supplier deliveries.

Source: Institute for Supply Management

The electronics sector expanded strongly in August, reaching a level last seen in early 2019, said Fiore. New orders were particularly robust, although imports and exports expanded at slower levels. One industry executive expressed concern over Covid-19 levels in foreign markets.

“Watching Covid-19 situations in Mexico, Brazil, Philippines [and] Hong Kong. High rates of Covid-19 surging,” the executive said. “Currently, lines of supply no longer impacted by Covid-19 related events.”

The electronics segment was the third strongest in August following food and beverages and chemicals, respectively. Manufacturer sentiment was generally optimistic (1.4 positive comments for every cautious comment), though to a lesser degree compared with July.

The one discordant note in the report was employment, which still hovers below 50 at 46.4 percent, although up 2.1 percent from July. ISM members reported that their companies and suppliers operated in reconfigured factories, with limited labor application due to safety restrictions.

“Factories are figuring out how to increase output with fewer people,” Fiore said. “At its low, our employment level was at 32, so it’s at a respectable point.” August marked the fourth consecutive month of improvement since the index’s low of 27.5 percent in April. “Three of the six big industry sectors experienced expansion,” said Fiore, "as factories were able to maintain significant gains in output with a reduced labor pool.”

But Fiore and economists predict manufacturing employment faces a number of hurdles even after the boost in August. Certain industry sectors, such as commercial aviation and oil and gas are not expected to bounce back in the short-term. Thirty-five percent of ISM respondents reported layoffs.

Long-term labor market growth remains uncertain, but strong new-order levels and an expanding backlog signify potential strength for the rest of the third quarter, Fiore added. Survey comments indicate that more panelists’ companies are hiring or attempting to hire compared to actively and passively reducing their labor forces.

The employment number is significant as no manufacturers are investing in capex—which usually boosts factory output -- for the rest of the year. “Impacted by the current economic environment, many panelists’ companies are holding off on capital investments,” Fiore explained. “That remains a big hole that will probably last at least a year.”