The US ISM Manufacturing PMI sector recorded a decline in economic activity in August for the fifth consecutive month, and for the twenty-first time in the last 22 months, according to the latest report from the Institute for Supply Management (ISM).® This report reflects the ongoing slowdown in the sector, indicating the continuing challenges facing the country’s manufacturing industries.
According to Timothy R. Fury, chair of the Manufacturing Business Survey Committee at the Institute for Supply Management, the manufacturing PMI rose slightly to 47.2% in August compared to 46.8% in July. Despite this slight increase, the index remains below 50%, indicating continued contraction in the sector. It is worth noting that the macroeconomy in the United States continues to expand for the fifty-second consecutive month, after a single contraction in April 2020.
The new orders index saw a decline to 44.6% in August, compared to 47.4% in July, indicating weak demand for manufactured goods. The output index also fell to 44.8% from 45.9% in the previous month, reflecting a further slowdown in manufacturing activities.
On the other hand, the price index rose to 54% in August compared to 52.9% in July, indicating an increase in production costs. The orders index also rose to 43.6% compared to 41.7% in July, while the employment index improved to 46% from 43.4% in the previous month, reflecting a slight improvement in the labor market within the sector.
The supplier deliveries index fell to 50.5% from 52.6% in July, suggesting a slowdown in deliveries as the economy improves and customer demand increases. The inventory index rose to 50.3% from 44.5% in July, reflecting a build-up in inventories. New export orders fell to 48.6% from 49% in July, while imports rose to 49.6% from 48.6% in the previous month, indicating continued pressure on the manufacturing sector.
Slight improvement in US manufacturing despite continued contraction
The US manufacturing sector saw a less sharp slowdown in its contraction in August compared to the previous month, although economic challenges persist. Fury explained that demand remains weak, as the new orders index fell to further contraction, and the index of new export orders contracted slightly. At the same time, the backlog index continued to contract strongly, while customer inventories stabilized at “quite adequate” levels, reflecting some stability on this side of the market. This indicates that companies are still struggling to stimulate demand for their products, which is negatively reflected in production and employment levels.
Output in the manufacturing sector also contracted moderately, with output falling more frequently than previously, while employment fell less sharply compared to July. Manufacturers further reduced production levels and reduced their workforce in August, in an attempt to cope with weak and persistent demand. However, inputs, which include supplier deliveries, inventories, prices and imports, continued to accommodate future demand growth, with part of this inventory growth due to the mismatch between the timing of supply and demand.
On the other hand, the economic and political situation in the United States influences corporate decisions, as companies are reluctant to invest in capital and inventories due to the current federal monetary policy and the uncertainty associated with the upcoming elections. This caused production to decline compared to July, adding to the pressure on profitability. However, the sector has seen some improvement, with the percentage of manufacturing GDP contracting falling to 65% in August from 86% in July. It is worth noting that some manufacturing industries, such as food and beverage, tobacco products, computer products and electronics, saw expansion in August after achieving no growth in July. However, many other industries, such as textile and printing factories and metal and rubber products, still suffering from deflation.
The importance and impact of the manufacturing PMI
The ISM Manufacturing PMI is a key economic indicator that measures the performance of the manufacturing sector in the United States. Here are some important points about the ISM Manufacturing PMI. :
Definition: The ISM manufacturing PMI is based on a monthly survey of purchasing managers in the manufacturing sector. It assesses factors such as new orders, production and staffing levels, supplier deliveries, and inventories.
Important: The PMI is a leading indicator of economic health because it provides insights into the state of the manufacturing sector. The PMI above 50 indicates expansion in manufacturing activity, while a reading below 50 indicates contraction.
Ingredients: Key components of the ISM manufacturing PMI include:
1. New orders: refers to future demand for manufactured goods.
2. Production: Reflects current and projected production levels.
3. Employment: Measures employment trends in the manufacturing sector.
4. Supplier deliveries: reflect supplier performance and potential bottlenecks.
5. Inventories: refers to changes in stocks of raw materials and finished goods.
6. Market impact: Changes in the ISM manufacturing PMI can affect financial markets. A higher-than-expected PMI reading can be considered positive for the economy and may lead to increased investor confidence, while a lower reading may have the opposite effect.
7. Policy implications: The Fed and policymakers closely monitor the ISM manufacturing PMI when making decisions on monetary policy, as it provides insights into economic growth, inflationary pressures, and labor market conditions.
8. Global Impact: The ISM manufacturing PMI is not only important for the US economy, but also serves as a barometer of global manufacturing activity. Changes in the US manufacturing PMI can have side effects on international trade and financial markets.
In short, the ISM Manufacturing PMI is a critical indicator that provides valuable information about the health and direction of the US manufacturing sector
