August Manufacturing ISM Report on Business; PMI at 49.1%

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Economic activity in the manufacturing sector contracted in August, and the overall economy grew for the 124th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business.

The report was issued today by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management (ISM) Manufacturing Business Survey Committee: "The August PMI registered 49.1%, a decrease of 2.1%age points from the July reading of 51.2%. The New Orders Index registered 47.2%, a decrease of 3.6%age points from the July reading of 50.8%. The Production Index registered 49.5%, a 1.3-percentage point decrease compared to the July reading of 50.8%. The Employment Index registered 47.4%, a decrease of 4.3 percentage points from the July reading of 51.7%. The Supplier Deliveries Index registered 51.4%, a 1.9-percentage point decrease from the July reading of 53.3%. The Inventories Index registered 49.9%, an increase of 0.4%age point from the July reading of 49.5%. The Prices Index registered 46%, a 0.9-percentage point increase from the July reading of 45.1%.

"Comments from the panel reflect a notable decrease in business confidence. August saw the end of the PMI expansion that spanned 35 months, with steady expansion softening over the last four months. Demand contracted, with the New Orders Index contracting, the Customers' Inventories Index recovering slightly from prior months and the Backlog of Orders Index contracting for the fourth straight month. The New Export Orders Index contracted strongly and experienced the biggest loss among the subindexes. Consumption (measured by the Production and Employment Indexes) contracted at higher levels, contributing the strongest negative numbers (a combined 5.6-percentage point decrease) to the PMI, driven by a lack of demand. Inputs — expressed as supplier deliveries, inventories and imports — were again lower in August, due to inventory tightening for the third straight month and continued slower supplier deliveries. This resulted in a combined 1.5-percentage point decline in the Supplier Deliveries and Inventories indexes. Imports and new export orders contracted to new lows. Overall, inputs indicate (1) supply chains are responding better and (2) companies are continuing to closely match inventories to new orders, a positive sign for future expansion. Prices contracted for the third consecutive month, indicating lower overall systemic demand. 

"Respondents expressed slightly more concern about U.S.-China trade turbulence, but trade remains the most significant issue, indicated by the strong contraction in new export orders. Respondents continued to note supply chain adjustments as a result of moving manufacturing from China. Overall, sentiment this month declined and reached its lowest level in 2019," says Fiore.

August 2019 Manufacturing Index Summaries

PMI

Manufacturing contracted in August, as the PMI registered 49.1%, a decrease of 2.1%age points from the July reading of 51.2%. This is the lowest reading since January 2016, when the index registered 48%. "The PMI contracted for the first time since August 2016 (when it registered 49.6%) and ended a 35-month expansion period in which the composite index averaged 56.5%. The August contraction ended four straight months of expansion softening. Only one of the PMI subindexes (Supplier Deliveries) registered expansion. Three of the six big industries modestly expanded, but two contracted strongly," says Fiore. A reading above 50% indicates that the manufacturing economy is generally expanding; below 50% indicates that it is generally contracting.

A PMI above 42.9%, over a period of time, generally indicates an expansion of the overall economy. Therefore, the August PMI indicates growth for the 124th consecutive month in the overall economy, and the first month of contraction following 35 straight months of growth in the manufacturing sector. "The past relationship between the PMI and the overall economy indicates that the PMI for August (49.1%) corresponds to a 1.8% increase in real gross domestic product (GDP) on an annualized basis," says Fiore.