On Tuesday (September 3), in early U.S. trading, data from the Institute for Supply Management (ISM) showed that the Manufacturing Purchasing Managers' Index (PMI) for August came in at 47.2, slightly higher than July's 46.8 but still below market expectations of 47.5.
The PMI is derived from a monthly survey of purchasing managers and is considered a "barometer" for predicting economic trends. Typically, an index above 50 indicates industry expansion, while below 50 indicates contraction. Notably, the ISM manufacturing PMI has been below 50 for five consecutive months, reflecting ongoing weakness in manufacturing activity. In the past 22 months, the PMI has been below 50 for 21 months, only briefly rising to 50.3 in March of this year.
Timothy Fiore, chair of the ISM manufacturing survey committee, noted, "Although manufacturing is still in the contraction range, the pace of contraction has slowed compared to last month. Weak demand, reduced output, and relatively loose input conditions."
He added, "Weak demand, Federal Reserve's monetary policy, and uncertainty about the U.S. election make companies hesitant to invest in capital and inventory." But he also mentioned that a reading of 47.2 is not extremely low because "as long as it is above 42.5, the overall economy can remain in expansion."
Following the data release, the three major U.S. stock indices fell further. As of publication, the Nasdaq Composite Index dropped more than 2.5%, while the S&P 500 and the Dow Jones indices fell over 1.5% and 1.1%, respectively.
It is noteworthy that before the ISM data release, S&P Global also released a report showing similar signs of weakness. S&P Global's Manufacturing PMI for August was revised down from 48 to 47.9, below market expectations of 48.1, while the July index was 49.6.
The S&P Global report also showed that the U.S. manufacturing employment index fell for the first time this year, while input costs rose to their highest level in 16 months, indicating persistent inflationary pressures.
Chris Williamson, chief business economist at S&P Global, stated that the further decline in PMI indicates that manufacturing is becoming a greater drag on the economy mid-way through the third quarter. Forward-looking indicators suggest that this negative impact may intensify in the coming months.
Williamson also pointed out that slower-than-expected sales have led to inventory buildups, and a reduction in new orders prompted factories to cut production for the first time since January. Due to concerns about overcapacity, manufacturers also laid off workers for the first time this year and reduced their purchases of production materials.
He concluded, "The decrease in orders and increase in inventory sent the gloomiest production trend signal in the past year and a half, and one of the most concerning economic signals since the Global Financial Crisis." Moreover, rising wages and high transportation costs have caused input costs to rise at the fastest pace since April last year.
