United States: ISM manufacturing index falls into contractionary territory for first time in three years
September 3, 2019
The Institute for Supply Management (ISM) manufacturing index fell to 49.1 in August from 51.2 in July, the lowest reading since January 2016. The reading undershot analysts’ expectations of 51.1, while also crossing below the 50- threshold that separates expansion from contraction in the sector, ending 35 consecutive months of expansion.
The contraction was due to a sharp decline in new orders, which thus caused production to fall as well. The new orders sub index fell for the first time since December 2015, halting 43 months of expansion, and came on the back of a steep drop in export orders, which fell to their lowest level since the financial crisis. Weaker conditions fed through to employment, with job creation contracting in August, after increasing in July, while feeble demand prompted businesses to reduce backlogs of work.
The gloomy August ISM report comes hot on the heels of the recent escalation in the chronic U.S.-China trade dispute with a new round of U.S. tariffs on USD 112 billion of Chinese goods coming into effect on 1 September. Many respondents noted that while current business remains solid, the uncertainty caused by the trade row was a major factor in the decline and is likely weighing on companies’ decision to invest.
One respondent noted that, “While business is strong, there is an undercurrent of fear and alarm regarding the trade wars and a potential recession.”
On the supply side, supplier delivery times slowed in August, however only marginally and suggested supply chain constraints are minimal. Meanwhile, inventories of inputs contracted again, albeit at a weaker pace, reflecting weaker demand. Input prices fell in August, with raw material prices for the majority of goods falling in the month.
Author: Lindsey Ice, Economist