ISM reports a decline in manufacturing after 35 months of growth

While recent months continued to show a pattern of a slowing down in manufacturing activity, even though the sector was still showing overall growth, data issued today by the Institute for Supply Management in its Manufacturing Report on Business (ISM) showed that manufacturing activity officially contracted in August, snapping a 35-month run of positive growth.

The report's key metric, the PMI, fell 2.1% to 49.1 (a reading of 50 or higher indicates growth), following a 0.5% decrease in July and 0.4%, 0.7%, and 2.7% declines in June, May, and April, respectively. Despite the PMI being in contraction territory, the overall economy grew in August for the 124th consecutive month. The August 2019 PMI is 5.3% below the 12-month average of 54.4, with August marking the lowest reading during that span and is also the lowest PMI reading going back to October 2016.

ISM reported that nine of the 18 manufacturing sectors it tracks saw growth in August, including: Textile Mills; Furniture & Related Products; Food, Beverage & Tobacco Products; Wood Products; Petroleum & Coal Products; Nonmetallic Mineral Products; Machinery; Miscellaneous Manufacturing; and Chemical Products. The seven industries reporting contraction in August — in the following order — are: Apparel, Leather & Allied Products; Fabricated Metal Products; Transportation Equipment; Primary Metals; Plastics & Rubber Products; Paper Products; and Electrical Equipment, Appliances & Components.

Each of the report's key metrics, including the PMI, were down in August.

New orders, which are commonly referred to as the engine that drives manufacturing, came in at 47.2, marking its first month of contraction after 43 consecutive months of expansion, over which time it had a cumulative average of 58.5. ISM said that three of the 18 manufacturing sectors it tracks grew in August.

Production, at 49.5, was down 1.3%, snapping a stretch of 35 consecutive months of growth, down for the first time since August 2016's 49.6. Four manufacturing sectors reported growth in August. Employment fell 4.3% to 47.4 after 34 consecutive months of growth, contracting for the first time since September 2016, when it was at 48.9.

And supplier deliveries, at 51.4 (a reading above 50 indicates contraction) was 1.9% lower than July's 53.3 reading, which is the lowest reading since September 2016's 50.2, marking the 42nd consecutive month of slowing supplier deliveries. Inventories were up 0.4% to 49.9, contracting for the third month in a row.

Comments in the report submitted by ISM member respondents were consistent, with commentary on slowing business conditions and ongoing trade tension between the United States and China.

A chemical products respondent noted that while business is strong there is an undercurrent of fear and alarm regarding the trade wars and potential recession. A furniture and related products respondent said that incoming sales seem to be slowing down during what is usually the respondent's busiest season, adding that there are concerns about the economy and tariffs.

ISM Manufacturing Business Survey Committee Chair Tim Fiore said in an interview that with new orders posting the lowest reading of the key PMI sub index, at 47.2, after a few months in the low 50s range, coupled with new export orders down 4.8% to 43.3, there is a direct correlation there.

“Without growth in new orders, nothing really happens,” said Fiore. “There is plenty of production capacity, employee levels are staffed to do more than they are doing, supply chains are positioned to respond, and inventory counts are being micromanaged. So, it is all really around the demand side. There are some slight positives here, with the customer inventories number declining slightly [down 0.8% to 44.9], which is still considered too low and is good for the future. And the backlog of orders number contracted to 46.3 but is not as strong as prior months…that's a slight positive. Those are the only positive things in this report.”

Fiore likened the data in this report, in viewing the current state of manufacturing, to the sector “running out of gas,” driven by a lack of new orders, which is happening because the global economy has slowed down and impacted various manufacturing sectors that are active exporters.

When asked about the possibility of the PMI getting back to a reading of 50 or higher by the end of 2019, Fiore explained that it is difficult to assess, as an increase in new orders is needed.

“We are entering a period of September, October, and half of November that are strong manufacturing periods,” he said. “That is a positive. August tends to be a sleepy month, with lots of people taking time off, which means there is not a lot of production output and not as many people are hired in August, and people are going back to school, too. Without the new export number coming back to expansion mode, it is unclear what is going to drive the new orders number up.”

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