United States PMI August 2018

United States

United States: ISM manufacturing index surges to 14-year high in August on a strong pickup in output and new orders

September 4, 2018

The U.S. manufacturing sector again registered an unexpectedly strong month in August, remaining on a well above-average growth path. The Institute for Supply Management (ISM) manufacturing index soared from 58.1 in July to 61.3 in August, significantly overshooting the predictions of analysts—who had expected the index to fall to 57.7—and reaching the highest level since May 2004. It thus remained comfortably above the 50-point threshold that separates expansion from contraction in the U.S. manufacturing sector, where it has been for 24 consecutive months.

The improvement in operating conditions in August came largely on the back of a sharp acceleration in new order growth, with the corresponding sub-index increasing by almost five points, coupled with a similar increase in production. Interestingly, the index for new export orders was largely stable in the month, which indicates that the higher new order growth in August was driven almost entirely by domestic demand. This reflects the exact opposite situation as in July, when the ISM index fell due in good part to lower domestic order growth.

Due to the elevated level of demand in the month, the supply-related indices consequently rose in August to levels consistent with full capacity utilization in the manufacturing sector. Indeed, employment growth accelerated, while backlogs of work also grew at a much faster rate, and supplier delivery times continued to lengthen more markedly—indicating growing stress within the supply-chain. Meanwhile, customer inventories continued to deplete, albeit at a slower pace, while conversely inventories of inputs and raw materials increased at a faster pace this month. This was partly a consequence of the uncertainty related to the ongoing and rapidly escalating trade feud between the U.S. and China, which is forcing manufacturers to stockpile raw materials; and partly due to the increasing lead times, which also pushes stocks comparatively higher in order to sustain elevated levels of production.

Weighing on this month’s results, Timothy R. Fiore, chair of the Institute for Supply Management manufacturing business survey committee, commented:

“Demand is still robust, but the nation’s employment resources and supply chains continue to struggle. Respondents are again overwhelmingly concerned about tariff-related activity, including how reciprocal tariffs will impact company revenue and current manufacturing locations. Panelists are actively evaluating how to respond to these business changes, given the uncertainty.”

Overall, momentum in the manufacturing sector is poised to remain strong in months to come, in good part thanks to the exceptional strength of the domestic economy which should continue in the current quarter and next. Nevertheless, firms will need to carefully balance high levels of activity with mounting headwinds, including a deteriorating trade environment, slowing global growth, shortages of available workers, and transportation difficulties caused by an unprecedented shortage of truck drivers in the United States.

FocusEconomics Consensus Forecast panelists expect industrial production to increase 3.7% in 2018, which is up 0.1 percentage points from last month’s forecast. In 2019, panelists see industrial production expanding 2.6%.

Author:, Economist

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United States PMI Chart

USA PMI August 2018 0

Note: Composite index in the Manufacturing Report on Business (PMI). Readings above 50% indicate an expansion in the manufacturing sector while readings below 50% point to a contraction.
Source: Institute for Supply Management.

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