August’s ISM reading of 49.4% was down from 52.6% in July and much worse than the anticipated 52.0%. Both the important new orders index and the production index were tangibly lower at 49.6% and 49.1%, respectively; furthermore, the employment index also moved lower. Comments from the respondents were much less constructive than in previous months.
Bottom line: August’s ISM at 49.4% was the lowest reading since January and suggests that the much-hoped-for second-half manufacturing recovery is still only just stumbling along. Weakness in August was quite broadly based, and much was likely to have been related to further inventory destocking and possibly uncertainty related to the upcoming elections. The fact that the employment index is now back below 50 for a second consecutive month is disappointing, and it raises some doubts about continued strength in the aggregate employment picture. Also of note, the new orders and production indices, both of which are good forward-looking indicators, suggest that actual factory orders will remain constrained. What was encouraging, however, was the comparative rise in export orders against the sharper decline in import orders, which hopefully translates into a slight improvement in the trade deficit. It also suggests that the stronger dollar may not have been as big a drag on activity here. Also encouraging was the further expansion in prices, which bodes well for corporate profits in the coming months. Overall, we continue to believe that any improvement in aggregate manufacturing activity is still likely to be slow and grinding, the dollar bull market is not yet over, inventory-to-sales ratios are still far too high, there is still plenty of excess production taking place globally, and demand from China and the rest of the world remains soft.
Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.