Manufacturing growth is down for third straight month, says ISM

Manufacturing growth in August remained as it had been in the previous two months—sluggish.

The PMI, the index used by the Institute for Supply Management (ISM) to measure manufacturing activity, was 49.6 in August, which is 0.2 percentage points below July and 0.1 percent lower than June.

A reading of 50 or higher indicates growth is occurring. Economic activity in the manufacturing sector had expanded for 34 straight months prior to June’s contraction and overall economic activity has expanded for 39 straight months. August was below the 12-month average of 52.2 and marked the third time it had been below 50—and its lowest reading—since July 2009.

New Orders, which are often referred to as the ‘engine’ which drives manufacturing, dipped 0.9 percent to 47.1, following a 0.2 percent bump in July and June’s 12.3 percent drop-off from May’s 60.1, which was its highest level since April 2011. New Orders had not seen this type of drop since October 2001, when it fell 12.4 percent.

Production was down 4.1 percent to 47.2, and Employment was down 0.4 percent at 51.6. Production in August was down for the first time since May 2009, when it was at 43.9 and is at its lowest level since November 2009. And Employment, while down in August, grew for the 35th consecutive month.

A Production index above 51.2 percent is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures, according to the ISM. And an Employment index more than 50.5 percent is generally consistent with an increase in the Bureau of Labor Statistics data on manufacturing employment.
 
“We are definitely on a flat stretch here, and there are potentially a few bumps or dips ahead as well,” said Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, in an interview. “This all really stems from the New Orders situation, with orders down for three months straight and along with that Export orders (up 0.5 percent at 47.0 but still below 50) down for three consecutive months having a negative impact.”

And Backlog of Orders—down 0.5 percent at 42.5—and at their lowest point since 2011 are all contributing to what Holcomb described as a glut in Production output.

Prices jumped up 14.5 percent in August to 54.0, marking the first time the PMI has seen an increase in the price of raw materials since April 2012, when Prices hit 61 and it is also the largest month-over-month increase since September 2005, following a 15.5 percent gain from August 2005, according to ISM officials. What’s more, the ISM pointed out that for this past August 23 percent of respondents said they paid higher prices than in July, with another 62 percent saying prices were the same and 15 percent said they paid lower prices. Prices at 49.4 percent or above are considered as “generally consistent” with an increase in the Bureau of Labor Statistics Index of Manufacturers Prices, according to ISM.

“This is largely related to fuel prices, corn products being affected by the Midwest drought that is severely impacting those prices, and a rise in plastic components and carbon and steel also which require energy to manufacture, so that is quite a jump as we have been down so much the last couple of months,” Holcomb said.

Inventories saw the negative net effect of slower overall sales, rising 4.0 percent to 53.0 and reflect how inventories are showing growth for the first time since September 2011.

Holcomb characterized this gain as “unwanted” inventory, which is not positive and speaks to the lack of new orders and a slowdown in production and manufacturers not being able to utilize the inventory on hand as they build up in an unwanted way. Should there be a similar gain in inventory from August to September Holcomb said that would not be a good situation.

ISM supply manager respondents in this month’s report cited a general theme of an economic slowdown, resulting in low order growth, coupled with backlog and unwanted inventory buildup.

And these comments, said Holcomb, directly speak to a slowdown in demand and incoming orders, too.

“Without new orders coming in, we are looking for more of the same at best over the next few months,” said Holcomb. “People are also waiting to see how the election turns out as well and what that means before they take their hands out of their pockets.”