U.S. factories continued to operate at a slower pace in August, raising concerns about the direction of the economy, as indicated by separate manufacturing indicators.
The Institute for Supply Management’s monthly survey of purchasing managers revealed that only 47.2% reported growth during the month, falling below the 50% threshold for activity.
Although this figure was slightly higher than July’s 46.8%, it fell short of the Dow Jones consensus forecast of 47.9%.
Timothy Fiore, the chair of the ISM Manufacturing Business Survey Committee, noted, “While still in contraction territory, U.S. manufacturing activity contracted at a slower rate compared to the previous month. Demand remains weak, output decreased, and input levels remained supportive.”
He added, “Demand remains subdued as companies are hesitant to invest in capital and inventory due to current federal monetary policy and election uncertainty.”
Despite the index indicating contraction in the manufacturing industry, Fiore highlighted that any reading above 42.5% generally indicates expansion across the broader economy.
A weaker-than-expected reading last month led to further market turmoil, resulting in the S&P 500 losing approximately 8.5% before recovering most of the losses. Stocks extended declines following the latest ISM release, with the Dow Jones Industrial Average dropping nearly 500 points.
Another weak economic report increases the likelihood of the Federal Reserve cutting interest rates by at least a quarter percentage point later this month. Traders raised the probability of a more aggressive half-point reduction to 39% after the ISM report, according to the CME Group’s FedWatch measure.
The survey showed that the employment index inched up to 46%, while inventories rose to 50.3%. In terms of inflation, the prices index slightly increased to 54%, potentially influencing the Fed’s decision on the extent of the anticipated rate cut.
The ISM findings were supported by another PMI reading from S&P, which declined to 47.9 in August from 49.6 in July.
The S&P employment index experienced a decrease for the first time this year, while the input cost measure reached a 16-month high, indicating that inflation persists, albeit lower than its mid-2022 levels.
Chris Williamson, chief business economist at S&P Global Market Intelligence, commented, “A further decline in the PMI suggests that the manufacturing sector is increasingly weighing on the economy in the middle of the third quarter. Forward-looking indicators indicate that this impact could intensify in the upcoming months.”
