There is slight disagreement when it comes to the health of the nation’s manufacturing industry in the wake of two reports issued on Thursday, but not when it comes to what pulled two gauges lower for August.
According to the monthly survey of purchasing managers by the Institute for Supply Management (ISM), economic activity in the sector contracted in August following five months of growth. Its Purchasing Managers Index (PMI) registered 49.4%, a decrease of 3.2 percentage points from the July reading of 52.6% with the latest performance coming in far worse than Wall Street expectations.
A reading above 50% indicates that the manufacturing economy is generally expanding; below 50% is a sign it’s generally contracting, according to the industry group.
Only six of the 18 manufacturing industries reported an increase in new orders in August, down from 12 in July, while only eight of the 18 reported an increase in August production, down from nine in July.
"The past relationship between the PMI and the overall economy indicates that the average PMI for January through August (50.9%) corresponds to a 2.4% increase in real gross domestic product (GDP) on an annualized basis,” said Bradley J. Holcomb, chair of the ISM Manufacturing Business Survey Committee. “In addition, if the PMI for August is annualized, it corresponds to a 2% increase in real GDP annually."
For comparison, the nation’s GDP expanded at a revised annual rate of just 1.1% in the second quarter of the year.
According to the survey, the New Orders Index registered 49.1%, a decrease of 7.8 percentage points from the July reading of 56.9%. The Production Index registered 49.6%, 5.8 percentage points lower than the July reading of 55.4%. The Employment Index registered 48.3%, a decrease of 1.1 percentage points from the July reading of 49.4%.
The drop in new orders is the first contraction since December 2015, however ISM’s New Export Orders Index registered 52.5% in August, the same reading as in July, indicating growth in new export orders for the sixth consecutive month.
"After today’s ISM Manufacturing Index showed a surprise contraction in August, we feel this is just the thing the Federal Reserve needs to continue to explain about why it will or will not raise interest rates later this month," said Brett F. Ewing, chief market strategist at Centaurus Financial.
“New orders also surprisingly fell, which would typically show a major issue in one of the most forward looking economic indicators economists look at when forecasting the economy,” he said in a research note. “But as we have stated in prior notes, we continue to believe the ISM Manufacturing Index doesn’t do a good job of accurately portraying the industries that matter in the new service driven economy.”
Different Survey Shows Slightly Better Conditions
Meantime a separate but similar survey from financial information services provider IHS Markit shows overall manufacturing conditions continue to expand, but like the ISM report, it shows new orders slowed in August.
Its final U.S. Manufacturing Purchasing Managers’ Index dropped from 52.9 in July to 52 in August but remained comfortably above the neutral 50 value.
The latest PMI reading was fractionally lower than the earlier preliminary estimate of 52.1 and signaled a weaker improvement in overall business conditions than the average of 54 since the survey began in late-2009. “Softer rates of new order and employment growth were the main factors weighing on the headline index in August,” the report said.
The latest upturn in new orders was slower than the nine-month peak seen in July, despite new export sales rising at the steepest pace since September 2014. In contrast, the report said manufacturers indicated a further solid increase in production volumes during the latest survey period, with the pace of expansion being the joint-fastest since November 2015. Anecdotal evidence suggested that improving economic conditions and sustained new business growth had led to increased production schedules.
“Despite the PMI falling in August, the survey suggests the third quarter is shaping up to be the best quarter so far this year for manufacturing, with output growth picking up compared to the first half of the year on the back of improved export sales,” said Chris Williamson, chief economist at Markit.
According to Williamson, there’s anecdotal evidence to suggest that this at least in part reflects a slowing in the economy in the lead up to the presidential election, meaning there’s room for growth later in the year.
“In the meantime, the overall sluggish pace of expansion, signaled by the survey, and the slacking of inflationary pressures, provides support to those arguing that interest rates should remain on hold,” he said.
Construction Spending Up 5.6% In First Seven Months of 2016
The reports were released the same day as one from the Commerce Department was issued about construction spending in July, which showed the level was nearly the same as the upwardly revised figure for the month before. That figure was less than Wall Street expectations, but 1.5% higher than July 2015.
During the first seven months of this year, construction spending amounted to $647.7 billion, 5.6% above the same period in 2015.
Overall private construction increased 1% in July from June, aided by residential construction moving higher by 0.3% and nonresidential building improving by 1.7%
In contrast, public construction fell 3.1% to its lowest level in more than a year, due to an 8.3% drop in educational building while highway construction edged higher by 0.3%.
According to Reuters, upward revisions to May and June construction data by the Commerce Department could help push higher the government’s estimate of GDP, which came in at annual pace of 1.1% during the second quarter last week, when it's revised later this month.