U.S. manufacturing shrinks in August

TEMPE, Ariz. – The U.S. manufacturing sector shrank in August for the first time in three months, although the overall economy grew for the 82nd consecutive month, according to the Institute for Supply Management’s latest member survey.
The trade group’s PMI – a composite index formerly known as the Purchasing Managers’ Index – fell 0.1 percentage point to a near-neutral 49.9 percent, the institute said today in its monthly Manufacturing ISM Report on Business. (A PMI of 50 percent indicates that equal numbers of manufacturers surveyed saw their business advance and decline; higher readings indicate the manufacturing economy is expanding. Over the past 12 months, the index averaged 49.6 percent.)
The index had been expected to hold steady its July level of 50.0 percent, according to a Bloomberg News survey of 72 economists. Their predictions of the August PMI ranged from 48.5 percent to 52.0 percent.
“The PMI indicates a slight decline in manufacturing during August,” wrote Norbert J. Ore, chair of the ISM Manufacturing Business Survey Committee. “This continues the 2008 trend toward negligible growth or contraction each month, but ultimately results in very little overall change in the sector.” But, he noted, because a PMI of 41.1 percent generally indicates the overall economy is expanding, the August reading “corresponds to a 2.8 percent increase in real GDP annually.”
“This month’s report is showing the first signs of lower prices, as the Prices Index fell significantly, though still [remained] at an inflationary level,” Ore added. “Export orders picked up additional momentum,” growing for the 69th consecutive month, “and that is important to manufacturers as domestic demand remains soft for most industries.”
The ISM’s New Orders Index rose to 48.3 percent last month, a 3.3-percentage-point increase from July’s 45.0 percent though still short of the 51.6-percent threshold consistent with increases in the U.S. Census Bureau’s factory-orders report, while the index of new export orders rose to 57.0 percent from July’s 54.0 percent. Among the 15 industries reporting last month, increases in new orders were reported by five – apparel, leather and allied products; paper products; miscellaneous manufacturing; computer and electronic products; and chemical products – but 10 industries failed to grow.
Meanwhile, the ISM’s Production Index rose in August to 52.1 percent, a 0.8-percentage-point decline from July’s 52.9 percent but still well above the 49.9-percent threshold generally associated with an increase in the Federal Reserve Board’s industrial production index. Of 11 industries reporting in August, production increases were reported by four – paper products; miscellaneous manufacturing; computer and electronic products; and chemical products – while seven industries failed to grow.
The trade group’s index of manufacturers’ inventories rose in August to 49.3 percent, an increase of 4.3 percentage points from July’s 45.0-percent reading, as factory inventories continued to shrink but at a slower rate than the month before. But the ISM’s Customer Inventories Index rose to 54.5 percent, an increase of 7.5 percentage points from July’s 47.0 percent, indicating that many manufacturers think their customers’ inventories are too high.
The ISM’s Employment Index fell to 49.7 percent last month, a 2.2-percentage-point decline from July’s 51.9 percent, but still above the 49.5-percent level “generally consistent with an increase in the [U.S.] Bureau of Labor Statistics’ data on manufacturing employment,” the trade group said.
The Prices Index “registered 77 percent in August, indicating manufacturers are paying higher prices on average when compared to July,” the ISM said. “While 60 percent of respondents reported paying higher prices and 6 percent reported paying lower prices, 34 percent of supply executives reported paying the same prices as the preceding month.”
The ISM Backlog of Orders Index rose to 43.5 percent last month from 43.0 percent in July. Higher backlogs were reported by respondents in four industries – petroleum and coal products; apparel, leather and allied products; miscellaneous manufacturing; and food, beverage and tobacco products – while eight industries saw declines.
“Manufacturing has been rather flat,” Ore said in a conference call this morning from Atlanta, according to Bloomberg News. “It’s a consistent story of slow contraction that’s been going on for quite some time.”
The Institute for Supply Management, the publisher of Inside Supply Management magazine, produces monthly Reports on Business for the manufacturing and non-manufacturing sectors. Additional information is available at www.ism.ws.