The Institute for Supply Management purchasing managers index—a key gauge of U.S. factory activity—dropped to 49.1 in August, from 51.2 a month earlier, hinting at the potential onset of an industrial recession. The index was pulled lower by slowing global growth due to continued economic uncertainty over trade issues. A number below 50 indicates the manufacturing economy is contracting. The index posted its fourth straight monthly decline and is now at the weakest level since February 2016.
The ISM’s measure of new orders, which are typically tracked as a leading indicator of a downturn, fell to 47.2, from 50.8 in July, the lowest reading since December 2015. At the same time, export orders continued to fall, plunging 4.8 points to 43.3, the lowest level since June of 2012. As a result, the employment index fell to just 47.4, from 51.7 in July, a three-year low.
The ISM purchasing managers index has continued to deteriorate over the past year as tariffs have forced domestic producers to examine alternative supply chains and delay their spending decisions due to continued uncertainty over trade policy. And while manufacturing only makes up about 11% of the U.S. economy, there are concerns that a period of sustained weakness could find its way into the rest of the economy and threaten the decade-long period of economic expansion.
A separate factory purchasing managers index from IHS Markit registered 50.3 on Tuesday, showing U.S. manufacturing was barely expanding. According to the report, “U.S manufacturers signaled a further slowdown in overall growth in August, with the PMI dropping to its lowest for almost a decade.” The data are consistent with other reports showing widespread weakness in manufacturing from Europe to Asia. With no clear end in sight for the U.S.-China trade war, we continue to expect a sluggish global economy will continue to weigh on producers.
With no clear end in sight for the U.S.-China trade war, we continue to expect a sluggish global economy will continue to weigh on producers.
RSM US Manufacturing Outlook Index
Weakness in the ISM indices was confirmed by our own RSM Manufacturing Outlook Index, which began forecasting a slowdown in manufacturing as recently as July, when it declined below the zero level. The composite index is based on surveys of business sentiment conducted by six regional Federal Reserve banks and can be considered representative of the general direction of national manufacturing activity.
Other issues creating headwinds for American manufacturers include a strong dollar, which has made domestic goods less competitive abroad, and a stall in some U.S. factory orders as aircraft giant Boeing continues to struggle with investigations related to design problems in its 737 Max aircraft, with major U.S. carriers recently extending grounding of the planes.