Manufacturing activity trends down in August, reports ISM

Data issued earlier today by the Institute for Supply Management (ISM) in its monthly Manufacturing Report on Business showed contraction in manufacturing activity for the month of August, snapping a stretch of five straight months of growth.

The PMI, the index used by the ISM to measure growth, was 49.4 (a reading of 50 or higher indicates growth) in August, which was down 3.2% compared to July for its first decline going back to February’s 49.5. August’s PMI is 0.8% below the 12-month average of 50.2. And the ISM said that the over all economy expanded in July for the 87th month in a row, despite the PMI’s decline in August.

Each of the report’s core four metrics, including the PMI, was down in August. New orders, which are often cited as the engine that drives manufacturing, dropped 7.8% to 49.1 for its first decline since December 2015, when it was at 49.8. Production was off 5.8 percent for its lowest level since checking in at 49.5 in August 2012, a four-year period. And employment fell 1.1 percent to 48.3 for its second straight decrease.

ISM said that of the 18 manufacturing sectors contributing to the report, only six reported growth in August, including: Printing & Related Support Activities; Nonmetallic Mineral Products; Computer & Electronic Products; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; and Chemical Products. The industries reporting contraction were Electrical Equipment, Appliances & Components; Apparel, Leather & Allied Products; Plastics & Rubber Products; Furniture & Related Products; Transportation Equipment; Machinery; Textile Mills; Paper Products; Petroleum & Coal Products; Primary Metals; and Fabricated Metal Products.

ISM member respondents cited in this month’s report were somewhat mixed. A chemical products respondent noted that he has been getting lots of inquiries but not a lot of sales order placements. A computer and electronics respondent said that business was flat overall for the month. On a more positive note, a nonmetallic mineral products respondent pointed to continued strong market demand for products related to construction, and food, beverage, and tobacco respondent said that new product distribution is increasing.

In an interview, Brad Holcomb, chair of the ISM Manufacturing Survey Business Committee, said this down month could end up being a one-month type of thing.

“I don’t see anything that really explains this…in terms of comments, themes, or concerns,” he said. “It was a hot month, with unfortunate flooding in Louisiana, but things do not suggest that this would continue, rather I think there is every reason to believe we will get back on track after the August blip.”

With the PMI at 49.4, it is close to growth territory, whereas the 7.8 percent decline in new orders is in close proximity to a 10.4 percent drop December 2014, making that level of decrease not unprecedented in recent times, he explained.

“New orders drives this whole system, and I don’t think there is anything to forewarn this, as consumer confidence and retail activity have been strong,” he said. “This has been a bit of an anomaly and certainly a blip on the screen.”

The 5.8 percent decline in production is in tandem with new orders falling, which dug into the backlog of orders as well, which fell 2.5 percent to 45.5 in August. The backlog is there for this reason and times like this, when new orders don’t show growth or are flat regardless of the reason, he added.

With the 12-month PMI average at 50.2, Holcomb said things have been moving upward; albeit not at a robust rate that has been seen in prior years, calling the last 12 months more of a “plow horse” manufacturing economy and the over all economy, too.

“The numbers are not strong enough to be called resilient at this point,” he said. “So it is not surprising that there has been a downward blip here or a pause in the action. But that may set up some pent-up demand activity further on in September and beyond.”