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Manufacturing Contracts for First Time in Three Years: ISM Report

Sept. 4, 2019
"Respondents expressed slightly more concern about U.S.-China trade turbulence, but trade remains the most significant issue, indicated by the strong contraction in new export order."

U.S. factory activity unexpectedly contracted in August for the first time in three years as shrinking orders, production and hiring pushed a widely followed measure of manufacturing to its lowest level since January 2016.

The Institute for Supply Management (ISM)  August PMI registered 49.1%, a decrease of 2.1 percentage points from the July reading of 51.2%..

August saw the end of the PMI expansion that spanned 35 months, with steady expansion softening over the last four months

"Respondents expressed slightly more concern about U.S.-China trade turbulence, but trade remains the most significant issue, indicated by the strong contraction in new export orders,” said Timothy R. Fiore., chair, ISM.”. Respondents continued to note supply chain adjustments as a result of moving manufacturing from China. Overall, sentiment this month declined and reached its lowest level in 2019.”

Here is a look at other indexes:

-New Orders Index registered 47.2%, a decrease of 3.6 percentage points from the July reading of 50.8%.

-The Production Index registered 49.5%, a 1.3-percentage point decrease compared to the July reading of 50.8%.

-The Employment Index registered 47.4%, a decrease of 4.3 percentage points from the July reading of 51.7%.

-The Supplier Deliveries Index registered 51.4%, a 1.9-percentage point decrease from the July reading of 53.3%.

-The Inventories Index registered 49.9%, an increase of 0.4 percentage point from the July reading of 49.%. The Prices Index registered 46%, a 0.9-percentage point increase from the July reading of 45.1%.

Furthermore, demand contracted,  and the Customers' Inventories Index recovering slightly from prior months. The Backlog of Orders Index contracting for the fourth straight month. 

Consumption (measured by the Production and Employment Indexes) contracted at higher levels, contributing the strongest negative numbers (a combined 5.6-percentage point decrease) to the PMI, driven by a lack of demand. 

Inputs — expressed as supplier deliveries, inventories and imports — were again lower in August, due to inventory tightening for the third straight month and continued slower supplier deliveries. This resulted in a combined 1.5-percentage point decline in the Supplier Deliveries and Inventories indexes. Imports and new export orders contracted to new lows. 

“Overall, inputs indicate supply chains are responding better and (2) companies are continuing to closely match inventories to new orders, a positive sign for future expansion. Prices contracted for the third consecutive month, indicating lower overall systemic demand,” said Fiore.

Comments from the survey

  • "Seeing some relief in the availability of electronic components in the marketplace, but there are still pockets of short supply, allocation, long lead times and the like. Tariffs continue to be a strain on the supply chain and the economy overall." (Computer & Electronic Products)
  • "While business is strong, there is an undercurrent of fear and alarm regarding the trade wars and a potential recession." (Chemical Products)
  • "Slowest month (July) this year so far in sales." (Transportation Equipment)
  • "Late planting of the corn and soybean crops has increased uncertainty over the final acres and yields. This is leading to volatile markets." (Food, Beverage & Tobacco Products)
  • "Slightly lower rate of incoming orders may be seasonal or a sign of a general slowdown. Monitoring closely." (Fabricated Metal Products)
  • "Incoming sales seem to be slowing down, and this is usually our busiest season. Concerns about the economy and tariffs." (Furniture & Related Products)
  • "Business is starting to show signs of a broad slowdown." (Machinery)
  • "Generally, business remains steady. However, we continue to plan for a hard Brexit and a long trade war between the U.S. and China." (Miscellaneous Manufacturing)
  • "The market for large building structures is slowing." (Nonmetallic Mineral Products)
  • "Current business is OK, nothing to brag about. Under projections and slightly below last year, [but] margins are hanging in there." (Plastics & Rubber Products)

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