On Tuesday, September 3, the Institute for Supply Management (ISM) announced that the manufacturing index for August rose slightly by 0.4 points to 47.2, up from the previous value of 46.8. This marks the fifth consecutive month of contraction in U.S. manufacturing activity.
A manufacturing index below 50 indicates a contraction. Following the release of the manufacturing data on Tuesday, the S&P 500 index and U.S. bond yields continued to decline.
The production index in the manufacturing sector dropped to its lowest level since May 2020 after declining for five consecutive months. The new orders index shows a contraction in order volumes, dropping to the lowest level in 15 months. Export orders also experienced the fastest contraction since the beginning of the year.
Bloomberg reported that declining orders and a continued reduction in backlogged orders are contributing to production shortages. The data suggest that the U.S. manufacturing sector is facing challenges, despite an increase in the ISM factory employment index, which has also contracted for the third consecutive month.
The August ISM index outperformed that of July, partly due to an increase in inventory and faster supplier deliveries, indicating that commodity inflation may further decline.
“The unexpected increase in inventories sets the stage for a slowdown in production in the coming months,” commented Bloomberg.
Rising borrowing costs and uncertainty surrounding the November presidential election have prompted some companies to postpone capital investments and hiring activities.
The ISM report indicates that performance varies across different industries in the manufacturing sector.
In the chemicals industry, business activities have notably slowed down, with optimism for future growth shattered.
In the transportation equipment sector, while invoices remain strong, backlogged orders have halved, leading to a significant slowdown in new orders. ISM expressed hopes for a resurgence in orders in the fourth quarter and in 2025, but anticipates that order levels will remain sluggish in the third quarter.
However, the outlook for the computer and electronic products sector remains positive, with a strong momentum expected for the second half of the year.
Order levels in the metal products industry continue to decline slowly and steadily, with this trend expected to persist until the end of the year. Some regions are facing tight labor markets, while others are experiencing labor shortages.
The paper products industry is also feeling a cooling off in business activities, with no bounce back expected before the end of the election.
“As we plan for the 2025 budget, we still have deep concerns about the increasing environmental costs of energy,” the report stated.
Cost remains a headache for all these industries. The ISM materials price index rose from 52.9 to a three-month high of 54 in August. After a decline for most of 2023, the input cost index has shown price increases every month this year.
Federal Reserve policymakers are expected to begin lowering interest rates later in September, which may provide some relief to businesses.
Chairman of the ISM Manufacturing Business Survey Committee, Timothy Fiore, stated in a conference call with reporters, “Undoubtedly, the potential rate cut in September will help, but I’m not sure how effective it will be in the short term.”
“It’s not until December or January that we will see real changes starting to take place,” he added.