August ISM: Prices Still Hot, Jobs Still Not — and Markets Split the Difference

The first big data point of the week landed with a soft thud. August’s ISM Manufacturing PMI rose to 48.7 from 48.0 in July—better, but still contractionary for a sixth straight month and a shade below the ~49 consensus. The market reaction said “mixed signals”: the dollar faded off early highs, long-end Treasury yields edged lower, and equities wobbled but found some footing as traders parsed a report that leans disinflation-lite on prices but recession-lite on activity.

Inflation vs. Employment: The Tension at the Core

The headline improved modestly, but the subcomponents are where the policy story lives. On inflation, the Prices index remained uncomfortably high at 63.7 (down from 64.8). That’s still “increasing,” just at a slower pace. With Supplier Deliveries moving up to 51.3 (from 49.3), supply chains are elongating again on the margin—historically associated with firmer demand and/or tighter input conditions. Customers’ Inventories fell to 44.6 (“too low”), typically a forward positive for production, but not today’s problem.

Employment tells the other half. The Employment index printed 43.8 (from 43.4), a slight uptick but still decisively contracting for a seventh month. Production slipped back into contraction at 47.8 (from 51.4). The combination—sticky input prices with weakening labor demand and output—keeps the “manufacturing stagflation” whisper alive, though today’s price deceleration helps the Fed narrative more than it hurts it. Net-net: inflation pressure is easing at the margin, but not enough to offset the soft labor/production backdrop in the factory sector.

Demand Stabilizes—On Paper

The notable bright spot is New Orders, which jumped to 51.4 from 47.1, returning to growth for the first time in seven months. New Export Orders also improved (47.6 vs. 46.1), still contractionary but less so. Meanwhile, Backlog deteriorated to 44.7 (from 46.8), implying that even as new demand perks up, there isn’t a cushion of old work to prop up production. Think of it as demand stabilization without clear follow-through—yet.

Inventories ticked up to 49.4 (from 48.9), still contracting but slower. The “too low” read on customers’ inventories, paired with improving orders, is classically a set-up for better output—if confidence and policy uncertainty stop getting in the way.

What Respondents Are Saying (and Why It Matters)

Commentary from the trenches was blunt:

• Tariffs are the recurring villain: firms report surcharges ranging from 2.6% to 50%, price re-quoting chaos, and delayed projects. Several note that “Made in USA” is harder to pencil given tariff-inflated inputs, with layoffs already underway in higher-skilled roles (engineering, design, finance).
• Transportation equipment respondents describe conditions “worse than the Great Recession,” with demand stalled and backlogs shrinking—attributed “100%” to tariff uncertainty.
• Construction-adjacent categories cite weak new builds and reliance on replacement demand, again pointing to cost-of-goods sold elevated by tariffed inputs.

These aren’t one-offs; they reinforce the survey’s broad message: price pressure is still filtering through supply chains, and firms are managing headcount rather than hiring while they negotiate a moving policy target.

Who’s Outperforming, Who’s Not

Seven industries expanded in August, led by Textile Mills; Apparel, Leather & Allied Products; Nonmetallic Mineral Products; Food, Beverage & Tobacco; Petroleum & Coal Products; Miscellaneous Manufacturing; and Primary Metals. Notably, Food, Beverage & Tobacco and Petroleum & Coal were among the six largest sectors showing growth—none did in July.

Ten industries contracted, including Paper, Wood Products, Plastics & Rubber, Transportation Equipment, Furniture, Machinery, Electrical Equipment/Appliances/Components, Computer & Electronic Products, Chemicals, and Fabricated Metals. That list tilts cyclically sensitive and capex-heavy—consistent with weaker production and employment reads.

Then vs. Now vs. Expectations

• Headline PMI: 48.7 vs. 48.0 prior; below the ~49 consensus.
• New Orders: 51.4 vs. 47.1 prior; clear beat and back in expansion.
• Production: 47.8 vs. 51.4 prior; notably weaker.
• Employment: 43.8 vs. 43.4 prior; still weak, only marginally better.
• Prices: 63.7 vs. 64.8 prior (and below many “unchanged-to-higher” expectations); still hot, slightly cooler.
• Supplier Deliveries: 51.3 vs. 49.3; slower, typically a positive signal if driven by demand, but ambiguous when production is falling.
• Backlog: 44.7 vs. 46.8; softer, reducing forward visibility.

In short, economists expected “less bad”; they got “a little less bad” on the top line but with a split personality underneath—better orders, worse output and still-costly inputs.

Market Reaction and the Fed Read-Through

Post-release, the dollar softened, Treasury yields eased (10s toward ~4.27%, 30s ~4.96%), and risk took a tentative breath. That pattern fits a report that nudges the inflation narrative in the right direction (prices off the boil) while underscoring employment/production softness in manufacturing. For the September 17 meeting, this on its own doesn’t force a pivot; it modestly supports the case for easing while keeping the Committee data-dependent into Friday’s jobs report and the services ISM.

The forward-looking takeaway: If improving New Orders and too-low Customers’ Inventories translate into higher Production in coming months without reigniting Prices, the Fed gets a cleaner landing lane. If not—if soft output meets sticky input costs—the employment side of manufacturing will keep dragging, and the policy debate stays messy.

For now, the ISM says the factory floor is still contracting, but the order book isn’t. The Fed will like that direction of travel—just not enough to relax until the labor and price lines finally rhyme.