The Institute for Supply Management (ISM) said that the manufacturing sector contracted in August for the third consecutive month. The purchasing managers’ index (PMI) was 49.6 in August, mostly unchanged from the previous two months. It had been 49.7 and 49.8 in June and July, respectively. This data shows just how soft the market is right now, with manufacturing activity at a near stand-still and everyone anxious about the future direction of the economy.
Most of the key subcomponents continue to contract, including new orders, production, and exports. Indeed, slowing sales were one of the central comments made by respondents who took this survey. As one individual from a computer and electronic products manufacturer noted, “Business is slow right now. Companies seem to be holding onto their money.” This was echoed by a chemical products company representative, who said, “Lackluster demand continues in all regions of the world ….”
With that said, the U.S. economy does continue to grow modestly, even as manufacturers begin to gear down. The overall measure for the macro environment reflects this, albeit with a slower pace of growth than last month. In addition, manufacturing employment is also up moderately, with the index for jobs currently at 51.6.
There are two other data points worth noting. First, inventories shifted from contracting last month to growing this time. This could suggest the weaker sales data. Second, the price index also went from contraction to expansion, up from 39.5 to 54.0. Manufacturers had benefitted from lower energy prices over the course of the last few months, but these costs have started to edge higher. In addition, some other raw material prices have also been higher. For instance, a food and beverage manufacturer wrote, “U.S. drought severely impacting raw material prices.”
In short, today’s ISM release confirms what we have seen in other economic indicators. The global economy is slowing down, weakening sales and heightening the worry of both manufacturers and consumers. As we approach the fiscal cliff, it has also become a major source of anxiety, and until policymakers are able to effectively address the nation’s challenges, U.S. economic growth will be hampered.