Economic Watch: Manufacturing Still Sluggish, Construction Declines

September marks another month of relatively subdued growth across the U.S. manufacturing sector, according to a preliminary report, and construction activity in the U.S. retreated in August.

The Flash U.S. Manufacturing Purchasing Managers’ Index from the financial information services provider Markit registered 53.0 in September, unchanged from August’s 22-month low, signaling one of the slowest rates of overall manufacturing sector expansion in the past two years.

The latest index reading is also weaker than the post-financial crisis average of 54.3.

Although output rose at a slightly faster pace in September, softer rates of new business and employment growth placed downward pressure on the headline PMI reading, according to the report. The latest increase in new work was the weakest since January 2014, which manufacturers linked to greater caution among clients and subdued overall business conditions.

New export orders picked up marginally in September, despite widespread reports that the strong dollar had weighed on demand from abroad. Although only slight, the latest rise was the most marked since February.

“The disappointing performance of the goods-producing sector has so far been offset by stronger expansion in the larger services sector, which means the economy looks to have grown at a reasonable 2.5% annualized pace in the third quarter," said Chris Williamson, chief economist at Markit. "But there are question marks over whether this growth can be sustained as we move towards the end of the year. Inflows of work showed the smallest rise since the start of 2014, and job creation has also slowed, he noted.

Williamson believes this sluggish growth, weaker forward-looking indicators and downturn in price pressures all point to the U.S. Federal Reserve holding off with rate hikes until next year.

This follows a separate report issued Monday showing new construction starts in August dropped 11% to a seasonally adjusted annual rate of $554.5 billion in the U.S., according to construction industry data provider Dodge Data and Analytics.

Declines were reported for each of construction's three main sectors. Nonresidential building and housing pulled back from their improved July pace, falling 16% and 8%, respectively, while nonbuilding construction continued to retreat for the third straight month from the heightened performance witnessed earlier in 2015. The sector fell 12% in August.

During the first eight months of 2015, total construction starts on an unadjusted basis are up 15% from the same period a year ago. If the volatile electric utility and gas plant category is excluded, total construction starts during the first eight months of 2015 would be up a more moderate 7% relative to last year.

"While August construction starts were notably subdued compared to recent months, it's useful to keep in mind that construction starts on a monthly basis will often show an up-and-down pattern, and the year-to-date statistics depict an expansion that's still proceeding," said Robert A. Murray, chief economist for Dodge Data and Analytics.