Manufacturing economy contracts for first time in nearly 3 years

The Purchasing Managers’ Index (PMI) fell 2.1 percentage points to 49.1% in August and was the first time in 35 months that economic activity in the manufacturing sector contracted after expansion had slowed over the past several months, according to the Institute for Supply Management (ISM). A reading above 50% indicates the manufacturing economy is expanding and below 50% indicates it’s contracting.

The new orders index decreased by 3.6 percentage points to 47.2%. The production index fell 1.3 percentage points to 49.5%. The employment index decreased 4.3 percentage points to 47.4%. The supplier deliveries index declined 1.9 percentage points to 51.4%. The inventories index rose 0.4 percentage points to 49.9%. The prices index rose 0.9 percentage points to 46%.

While the overall economy expanded for the 124^th consecutive month, business confidence has fallen, according to the ISM. Demand decreased, the new orders index declined, the customers’ inventories index rose, and the backlog of orders index fell for the fourth consecutive month. The new export orders index fell and had the largest decrease of the subindexes. Consumption, which is measured by the production and employment indexes, fell and led the PMI to a combined decrease of 5.6 percentage points, driven by a lack of demand. Inputs, which comprises supplier deliveries, inventories and imports, fell in August as inventories tightened for the third consecutive month and supplier deliveries slowed. As a result, the supplier deliveries and inventories indexes decreased a combined 1.5 percentage points. Imports and new export orders fell to new lows. Overall, inputs show that supply chains are responding better and companies are matching inventories to new orders, which is a positive sign for future expansion. Prices declined for the third consecutive month, which indicates overall lower demand.

Concern rose with regard to the trade war between the United States and China, and trade remains the most significant issue, which is indicated in the contraction in new export orders. Supply chain adjustments have been made as a result of moving manufacturing from China. Overall, sentiment fell in August and reached its lowest level in 2019, according to the ISM.

The following 18 manufacturing industries reported growth in August: textile mills; furniture and related products; food, beverage and tobacco products; wood products; petroleum and coal products; nonmetallic mineral products; machinery; miscellaneous manufacturing and chemical products. Following seven industries reported contraction in August: apparel, leather and allied products; fabricated metal products; transportation equipment; primary metals; plastics and rubber products; paper products and electrical equipment, appliances and components.