Report On Business® Roundup: August Manufacturing PMI®
Earlier this year, the Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee used a list of S-words to sum up the monthly data, and the August numbers elicited another, pulled from childhood memories for nearly 80 years.
The Manufacturing PMI® reading of 47.2 percent reflected a sector that had largely moved beyond U.S. monetary policy hesitancy — an interest rate cut this month appears to be a cinch — and into uncertainty regarding U.S. elections in November. Timothy R. Fiore, CPSM, C.P.M., referred to this transition with the name of an iconic toy that dates back to the 1940s.
“It’s a Slinky cycle,” Fiore told a conference call of reporters on Tuesday. “Unfortunately, it’s not the extended Slinky cycle where it’s all stretched out. It’s the compressed cycle, and it’s likely to stay there through the end of the year.”
The recent stretch of contraction — the PMI® has registered below 50 percent 21 times in the last 22 months — is historic. The composite index was in contraction for 18 straight months from August 2000-January 2022, and 16 out of 18 months from February 2008-July 2009, which covered much of the Great Recession.
While the length of time is comparable, the severity is not. The PMI® got as low as 40.8 percent in October 2001 in the dot-com bust and plummeted to 34.5 percent in December 2008 amid a global market meltdown. The low point in the current cycle is 46.4 percent in June 2023, which leads to another S-word that Fiore sometimes uses: stable.
A composite index consistently in the high 40s is not ideal, but stability is not the worst place in the world to be. However, for a manufacturing sector that was generating PMI® readings above 60 percent during the coronavirus pandemic recovery, it’s long become “unsatis-factory,” per a headline in an analysis of the August data by BMO Capital Markets Economic Research.
“So, what it looks like is status quo with the various indicators because they haven’t really changed all that much,” Bloomberg TV analyst Michael McKee said after the PMI® data was released. “(They’ve been) in the mid-40s to 50 for almost a year now and maybe close to two years, telling us there hasn’t been any significant improvement in manufacturing.”
According to Fiore, the story of August centered on output, with the Production Index registering 44.8 percent, the lowest reading of the current contraction cycle. That has had a domino effect on jobs; while the Employment Index increased to 46 percent, but survey respondents’ comments regarding head-count reductions were at their highest level since Fiore began tracking them two years ago, he said.
“U.S. companies are stepping down their production plans, and that’s why you're seeing the production number come down, which means revenue is coming down,” Fiore said. “That’s why you see employment (contracting) too because although we’ve been dropping employment for some time, it’s become a lot more urgent. Panelists say their companies can’t afford to hold these workers without additional work coming in during the next three to six months.”
The Inventories Index was the most eye-popping subindex number, with the increase of 5.8 percentage points to 50.3 percent boosting the PMI® and seemingly belying sentiment that companies are hesitant to invest in inventories due to interest-rate uncertainty. But production issues were the most likely reason, Fiore said, as companies adjusted to the lower outputs and diminished backlogs — but not in time.
“They couldn’t shut the spigot off fast enough,” he said.
ISM manufacturing showed modest improvement in the overall index and employment but the new orders index declined. pic.twitter.com/IgJbK3oYHF
— Kathy Jones (@KathyJones) September 3, 2024
The Prices Index registered 54 percent, up 1.1 percentage points. While volatility with such commodities as metals, plastics and fuel continue, Fiore said Hurricane Beryl and other storms likely impacted availability of some chemicals, impacting their prices.
After none of the six largest manufacturing industries reported growth in the previous month, two — Food, Beverage & Tobacco Products, and Computer & Electronic Products — did so in August. As a result, 65 percent of manufacturing gross domestic product (GDP) contracted in August, down from 86 percent in July.
The share of manufacturing sector GDP registering a composite PMI® calculation at or below 45 percent (a good barometer of overall manufacturing weakness) was 33 percent in August, a 20-percentage point improvement compared to the 53 percent reported in July.
The manufacturing sector’s Slinky is standing upright, stuck in place — but it’s not pulling itself down the stairs, either. Regardless of the election outcome, it’s possible the elements are in place for a manufacturing recovery in 2025, Fiore said.
“The closer we get to normal interest rates, the closer we will get the normal supply-demand environment,” Fiore said. “The only other issue here is the election. As far as global issues and conflicts happening around the world, that’s a whole different discussion.”
S&P and ISM Manufacturing PMI data gives us a sense that demand is slowing and we're seeing the first industry-wide staffing cuts of 2024.
— Markets & Mayhem (@Mayhem4Markets) September 3, 2024
This is more data that adds to the narrative that the labor market is (and has been) weakening.
But was it ever that strong to begin with? pic.twitter.com/jXJu7Tg9nU
The Report On Business® roundup:
Barron’s: U.S. Manufacturing Activity Remains Weak Ahead of Expected Fed Rate Cuts. “Things just aren’t very good for manufacturers right now. Orders, and even politics, are the current problems. ... A silver lining for investors is that continued weakness means the Federal Reserve is likely to lower benchmark interest rates when it meets on September 17-18. Hopefully, rate cuts help spur demand.”
Bloomberg: U.S. Manufacturing Activity Contracts for a Fifth Straight Month. “To the extent that August’s uptick was supported by a jump in inventories and quicker supplier deliveries, the print indicates the potential for additional goods disinflation,” Stuart Paul of Bloomberg Economics stated in a note to subscribers. “An unintentional buildup of inventories sets the stage for a production slowdown in the months ahead.”
CNBC: ISM Manufacturing Measure Shows Activity Disappointed in August. “I was looking at the internals, and (the Employment Index) actually beat expectations at 46 percent,” Carl Quintanilla said. “We were looking at something around 44 (percent).” Recent weak manufacturing data, co-host Sara Eisen added, “may be why commodities are under pressure today — oil prices, copper is seeing a selloff, silver as well.”
MarketWatch: U.S. Manufacturers Still Mired in Slump. Fed Rate Cuts to Help, ISM Says, but Only After the Election. “The prospect of lower U.S. interest rates is expected to give manufacturers a shot in the arm after a prolonged slump. The Federal Reserve is all but assured to start cutting rates in mid-September in response to a slowdown in inflation. Yet Fiore cautioned the benefits of lower rates could take a while to show up.”
Reuters: U.S. Manufacturing Edges Up in August From Eight-Month Low, but Trend Remains Weak. “The (Prices Index) increased to 54 percent from 52.9 percent in July. That suggests goods deflation has probably run its course for now but will probably not have a material impact on inflation, which is slowing. Goods prices were unchanged in July after falling for two straight months.”
ISM’s Services PMI® will be unveiled on Thursday, and the Hospital PMI® on Friday. For the most up-to-date content on the reports under the ISM® Report On Business® umbrella, use #ISMPMI on X, formerly known as Twitter.
(Photo credit: Getty Images/Sweet Bun Factory)