Manufacturing activity moderates in August

by Jeff Della Rosa ([email protected]) 186 views 

Economic activity in the manufacturing sector contracted in August but at a slower rate compared to July, according to the Institute for Supply Management (ISM). Activity has fallen for 10 consecutive months.

The ISM released Friday (Sept. 1) the Manufacturing ISM Report on Business, showing the purchasing managers’ index (PMI) rose by 1.2 percentage points to 47.6% in August from July. A reading below 50% indicates manufacturing sector activity is contracting.

According to the report, new orders, employment and backlogs decreased. Supplier deliveries were faster. Raw materials inventories fell. Customers’ inventories were too low. Prices fell, and exports and imports contracted.

“The U.S. manufacturing sector shrank again, but the uptick in the PMI indicates a slower rate of contraction,” said Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee. “ The August composite index reading reflects companies managing outputs appropriately as order softness continues, but the month-over-month increase is a sign of improvement.”

Following manufacturing industries grew in August: printing and related support activities; transportation equipment; food, beverage and tobacco products; petroleum and coal products; and miscellaneous manufacturing.

“Demand remains soft, but production execution is consistent with new, reduced output levels based on panelists’ companies order books,” Fiore said. “Suppliers continue to have capacity. Prices are generally stable. Sixty-two percent of manufacturing gross domestic product (GDP) contracted in August, down from 92% in July, a positive trend for the economy. Additionally, the share of manufacturing GDP registering a composite PMI calculation at or below 45% – a good barometer of overall manufacturing weakness – was 15% in August, compared to 25% in July and 44% in June, a clear positive.”

Respondents provided mixed comments about the manufacturing sector. Some noted falling orders and soft demand, while others reported strong sales and improving business.

A respondent in the primary metals industry said, “Automotive volume remains strong in preparation for the United Auto Workers’ potential strike at Ford, General Motors and Stellantis. Contingency plans in place for sub-tiers. Continue to have issues recruiting general labor employees. Operational efficiency is suffering due to a lack of human resources. Order book remains strong and ahead of 2022.”

Several respondents highlighted the challenges regarding customers’ high inventory levels. In the plastics and rubber products industry, a respondent said, “business is beginning to improve moderately. Still well below 2022 levels, but it appears that the ‘great inventory rebalancing’ is finally coming to fruition.” In the chemical products industry, a respondent said, “demand still weak. Customer inventories are getting depleted; however, we are not seeing a real uptick in demand. General supply conditions are softening.”

In the food, beverage and tobacco products industry, a respondent said, “Customer orders have softened. This is likely due to customers’ increased confidence in the supply chain, (which) has them reducing their inventories. Customers are also being pinched with higher interest rates. Additionally, consumers are feeling their purchasing power eroded by stubbornly high inflation, so they are purchasing less.”

A respondent in the computer and electronic products industry said, “further reductions in customer orders due to the economic situation and also their working down of own inventories. Backlog is dwindling but still showing robust revenue.”

In the transportation equipment industry, a respondent said orders have moderated, but “we’re continuing to ship to max capacity, with supply constraints still a real part of our day-to-day business operations.”

A respondent in the fabricated metal products industry was uncertain whether a decline in customer demand was because of an “inventory correction. Logistics stabilized, and costs are matching 2019. Shortages limited to only a few items now, but suppliers are hesitant to add or replace labor needed in light of slowing demand.”

A paper products industry respondent said, “the manufacturing sector continues to be slow, and the low market prices make it difficult to stay profitable. On the positive side, laborers are showing enthusiastic employment interest. Rising energy and fuel prices are of concern to our company.”

In the wood products industry, a respondent said, “(The Federal Reserve’s) actions to increase borrowing costs have dampened demand for residential investment. Recently, this slowdown plateaued somewhat, with demand stabilizing. The outlook for 2024 remains uncertain, and we continue to be cautious about building inventories.”