The sentiment among U.S. manufacturers improved in August, continuing the improving trend this year. The ISM Manufacturing purchasing managers index registered 54.6% in August versus 55.6% in July, an eighth straight month of expansion.
Tariff refunds, rising business and government spending on defense and AI-related products have been the main tailwinds for overall manufacturing demand.
The new orders and production subindex inside the ISM report released on Tuesday remain at a multiyear high. Production held at 58.3% while new orders came in at 53.7%.
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But rising prices and supply disruptions have also been a problem for U.S. producers. Most of what the respondents said in August was concern about supply chains and higher input prices. Negative comments outnumbered positive ones by 58% to 42%, with pricing volatility cited most often.
The concerns were also reflected in the inventory and prices paid subindex, which pointed to a low level of inventories as prices increased on the month.
Customers’ inventories stayed in “too low” territory at 42.8% and the prices index held at 71.1%, a 23rd straight month of rising raw materials costs.
If anything, the new data on manufacturing activity should add more to the Federal Reserve’s rate hike odds than its policy rate staying on hold this month, even if it is a tiny increase.
Futures markets were already pricing roughly a 66% chance of a 25 basis-point move at the Sept. 16 meeting as of Monday.
In a separate report from the Bureau of Labor Statistics, job openings edged slightly higher in July after being revised down materially in June.
Openings rose to 7.27 million from a downwardly revised 7.18 million, with the openings rate steady at 4.4% and durable goods manufacturing postings up 76,000.
June was marked down by 177,000. Overall, the data continued to point to a cooling yet solid labor market after a strong first quarter.
There were no signs yet from the report that either quits or layoffs have been a problem. Both layoff and quit rates fell only slightly in July. Quits held at 3.1 million and a 1.9% rate, while layoffs and discharges were 1.7 million at a 1.0% rate.
Hiring did post a big drop that was consistent with the negative payroll number we got earlier this week. Total hires were 5.1 million at a 3.2% rate, dragged down by a 188,000 decline in professional and business services.
Looking ahead, with somewhat of an improvement in labor demand in July, we could expect the payroll number for August, which will be released this Friday, to show a more encouraging number.
Our forecast is pointing to an increase of 25,000 jobs in August and the unemployment rate remaining at 4.1%. That would follow July’s 23,000 decline and an average monthly gain of 34,000 over the prior 12 months. Those numbers will certainly help the Fed doves a lot more to make the case for a hold.
