ISM: Manufacturing Takes A Breather

Economic activity in the manufacturing sector contracted in August following five consecutive months of expansion, while the overall economy grew for the 87th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.

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Economic activity in the manufacturing sector contracted in August following five consecutive months of expansion, while the overall economy grew for the 87th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.

Manufacturing contracted in August as the PMI registered 49.4 percent, a decrease of 3.2 percentage points from the July reading of 52.6 percent, indicating contraction in manufacturing for the first time since February 2016 when the PMI registered 49.5. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

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Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management Manufacturing Business Survey Committee states, “The past relationship between the PMI and the overall economy indicates that the average PMI for January through August (50.9 percent) corresponds to a 2.4 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for August (49.4 percent) is annualized, it corresponds to a 2 percent increase in real GDP annually.”

A PMI above 43.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the August PMI indicates growth for the 87th consecutive month in the overall economy, while indicating contraction in the manufacturing sector for the first time since February of this year.

Orders, Production and Inventory

ISM’s New Orders Index registered 49.1 percent in August, which is a decrease of 7.8 percentage points when compared to the 56.9 percent reported for July, indicating contraction in new orders for first time since December 2015 when the New Orders Index registered 48.8 percent. A New Orders Index above 52.2 percent, over time, is generally consistent with an increase in the Census Bureau’s series on manufacturing orders (in constant 2000 dollars).

ISM’s Production Index registered 49.6 percent in August, which is a decrease of 5.8 percentage points when compared to the 55.4 percent reported for July, indicating contraction in production in August and its lowest reading since August 2012 when the Production Index registered 49.5. An index above 51.3 percent, over time, is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.

The Inventories Index registered 49 percent in August, which is a decrease of 0.5 percentage point when compared to the 49.5 percent reported for July, indicating raw materials inventories are contracting in August for the 14th consecutive month. An Inventories Index greater than 42.8 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis (BEA) figures on overall manufacturing inventories (in chained 2000 dollars).

ISM’s Backlog of Orders Index registered 45.5 percent in August, a decrease of 2.5 percentage points when compared to the July reading of 48 percent, indicating contraction in order backlogs for the second consecutive month. Of the 88 percent of respondents who reported their backlog of orders, 18 percent reported greater backlogs, 27 percent reported smaller backlogs, and 55 percent reported no change from July.

Exports, Imports and Prices

ISM’s New Export Orders Index registered 52.5 percent in August, the same reading as in July, indicating growth in new export orders for the sixth consecutive month.

ISM’s Imports Index registered 47 percent in August, which is 5 percentage points below the July reading of 52 percent. This month’s reading indicates contraction in imports following four consecutive months of the Imports Index registering 50 percent or above.

The ISM Prices Index registered 53 percent in August, which is a decrease of 2 percentage points when compared to the 55 percent reported for July, indicating an increase in raw materials prices for the sixth consecutive month. In August, 19 percent of respondents reported paying higher prices, 13 percent reported paying lower prices, and 68 percent of supply executives reported paying the same prices as in July. A Prices Index above 52.4 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Producer Price Index for Intermediate Materials.

Employment

ISM’s Employment Index registered 48.3 percent in August, a decrease of 1.1 percentage points when compared to the July reading of 49.4 percent, indicating contraction in employment in August for the second consecutive month. An Employment Index above 50.6 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.

The monthly Manufacturing ISM Report on Business is based on the survey results of approximately 350 professionals across 18 different industry sectors. The report is released on the first business day of each month and features the PMI Index as its key measure. For more information on the Institute for Supply Management, visit www.ism.ws.

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