August Manufacturing Output Continues Losing Streak

While seeing a slight sequential increase, manufacturing output contracted again in August, according to the new edition of the Manufacturing Report on Business, which was issued last week by the Institute for Supply Management (ISM).

The report’s benchmark metric, the PMI increased 1.2%, to 47.6 (a reading of 50 or higher indicates growth), contracting, at a slower rate, for the 10th consecutive month. The past 10 months of contraction were preceded by a stretch of 29 consecutive months of growth. ISM also said that the overall economy contracted, at a slower rate, in August, for the ninth consecutive month, which was preceded by 30 consecutive months of growth.

The August PMI is 0.2% below the 12-month average of 47.8, with September 2022 marking the high for that period, at 51.0, and June 2023, at 46.0, marking the lowest.

ISM reported that five manufacturing sectors saw growth in August, including printing & related support activities; transportation equipment; food, beverage & tobacco products; petroleum & coal products; and miscellaneous manufacturing. The 13 industries contracting in August included apparel, leather & allied products; furniture & related products; plastics & rubber products; primary metals; fabricated metal products; textile mills; electrical equipment, appliances & components; chemical products; computer & electronic products; paper products; wood products; nonmetallic mineral products; and machinery.

The report’s key metrics were mixed in August, including:

• New orders, which are considered the engine that drives manufacturing, fell 0.5%, to 46.8, contracting, at a faster rate, for the 12th consecutive month

• Production headed up 1.7%, to 50.0, contracting, at a slower rate, for the second straight month;

• Employment slipped 3.7%, to 44.4, unchanged after contracting for two months;

• Supplier deliveries, at 48.6 (a reading above 50 indicates contraction), moved faster, at a slower rate, for the 11th consecutive month, for its highest reading in the last 11 months;

• Backlog of orders, at 44.1, increased 1.3%, contracting, at a slower rate, for the 11th consecutive month;

• Inventories, at 44.0, were down 2.1% compared to July, contracting, at a faster rate, for the sixth consecutive month;

• Customer inventories, at 48.7, were flat compared to July, heading “too low,” at a faster rate, for the third straight month; and

• Prices, at 48.4, were up 5.8%, decreasing, at a slower rate, for the fourth consecutive month

Comments submitted by the ISM member respondents again highlighted various themes related to the economy and market conditions.

A chemical products respondent observed that demand still weak, adding that customer inventories are getting depleted minus a real uptick in demand, coupled with general supply conditions softening.

“The manufacturing sector continues to be slow, and the low market prices make it difficult to stay profitable,” said a Paper Products respondent. “On the positive side, laborers are showing enthusiastic employment interest. Rising energy and fuel prices are of concern to our company.”

In an interview, Tim Fiore, chair of the ISM’s Manufacturing Business Survey Committee, said that the manufacturing sector has been in what he called the “trough” since June.

“The reason I’m saying that is that we’ve been hanging around 47 [the PMI reading] for a long time,” he said. “We beat expectations this month, as the economists had us down almost a point from where we ended up. And I think we beat the three-month rolling average for the PMI, so this is the strongest summer that we’ve had in quite some time.”

What’s more, Fiore explained that going back to June, 93% of the manufacturing sector was in contraction mode, with that tally declining to 63% in August. And, more importantly, he said that 44% of the sector was contracting at a PMI level of 45 or less in June, which went down to 25% in July, with that figure shrinking to 16% in August.

“That is a huge shift, and the number is coming down,” he said. “That kind of indicates that every industry sector is starting to recover with only 60% at 45 or less. The historical number for that is closer to 10%-to-15%. On the output side, production and employment were pretty stable, and employment did not contract as much as it did in July, with the indication being that companies did not use layoffs as often as they did in July. Manufacturers are using a slower process to get the down to the right target level, which kind of indicates that they think they have a little bit more time to get there. If they did not have the time, they would be laying off people.

In terms of industry sentiment, Fiore said August marked the strongest it had been about manufacturing’s moderate and long-term future in a long time, with nearly a 2:1 ratio of positivity versus not so positive, which is up from 1:4 or 1:5 in prior months.

“The production and new orders comments support the fact that people are feeling a little bit better about the future,” he said. “The uncertainty isn’t as uncertain this month. They are they’re resizing for an appropriate output, and they, they feel good that they’re going to get there.”

When asked how this impacts the direction for manufacturing in the coming months, Fiore reiterated that the sector remains in a trough, meaning it is unlikely current readings will go much lower than any numbers seen so far.

“The PMI may drop below 47.6 again, but it is just as likely it will be above that,” he said. “The low Inventory number at 44.0 is alarming, but what it really says is there is a ton of upside on the inventory index and that is going to add 20% to the PMI number. Even if the new orders level and production and Employment was about the same, supplier deliveries are inching better every month. We have had three straight months of supplier deliveries being a little more difficult and delivering slower but not as slow in the prior month. The big upside here is really the raw material inventory at 44. That should be around 50-to-52. Add six points or eight points, or 20% of that, and you got a 1.6-point climb in the PMI.”

SC
MR