US Manufacturing Slump Deepens in August as Orders Hit 15-Month Low

The U.S. manufacturing sector experienced its fifth consecutive month of contraction in August, with orders and production metrics declining at an accelerated pace.
Data from the Institute for Supply Management (ISM) released on Tuesday revealed that the manufacturing index improved slightly by 0.4 points to 47.2, yet remained below the 50 benchmark indicative of economic contraction.
The report came out concurrently with declines in both the S&P 500 Index and U.S. Treasury yields.
The production indicator has been on a continual downtrend, marking its lowest point since May 2020, while the new orders index plummeted to a 15-month low. Additionally, export orders shrunk at the fastest rate since the beginning of the year.
Decreasing orders and backlog levels have been steadfast obstacles to production, highlighting the ongoing struggles within the manufacturing sector. The ISM manufacturing employment index did see a rise but still indicated contraction for the third month in a row.
Rising borrowing costs and uncertainty surrounding the upcoming presidential election have caused some companies to delay capital expenditures and hiring. However, Federal Reserve policymakers are expected to begin lowering interest rates later this month, a move that should offer some relief to manufacturing enterprises.
Costs remain a significant concern. The ISM's raw materials price index rose to 54 in August from 52.9, reaching a three-month high. This is a departure from the falling input cost metrics observed for much of 2023, with costs having increased every month this year.
A positive takeaway from the latest ISM data is that manufacturers are managing their inventory levels more effectively. A measure of customer inventories indicated that stock levels have been declining each month since late last year.
August saw the U.S. manufacturing index rebound from its eight-month low observed in July, primarily due to improvements in employment statistics. The ISM's manufacturing PMI for August stood at 47.2, slightly up from July's 46.8, which was the lowest level since November. Although PMI has been below the 50 threshold for the past five months, it remains above 42.5, a level ISM associates with future overall economic expansion in the long term.
Hard data on manufacturing output and business equipment spending illustrate that the sector remains largely stagnant. The sub-index for new orders dropped to 44.6, while production declined further to 44.8. Despite the weak order numbers, manufacturers face rising input product prices, potentially driven by surging freight costs. The sub-index measuring prices paid by manufacturers climbed to 54 from 52.9 in July, indicating that commodity deflation may be ending but is unlikely to significantly impact the slowing inflation.
Employment within the manufacturing sector continues to contract, albeit at a reduced rate, with the employment sub-index rising to 46.0.