U.S. manufacturing activity shrank for a fifth straight month in August, reflecting a faster decline in orders and output.

Data released on Tuesday showed that the Institute for Supply Management (ISM) manufacturing PMI index rose slightly by 0.4 points to 47.2, below the threshold of 50 for the fifth consecutive month. But it is above 42.5, which the ISM believes usually indicates that the overall economy will gradually expand in the future.

After the report was released, the S&P 500 index and U.S. Treasury yields continued to fall, and gold fell to around $2,470 at one point, but has now recovered.

Hard data such as manufacturing production and business equipment spending show that the manufacturing industry is basically stagnant. The organization's production index fell for the fifth consecutive month, falling to its lowest level since May 2020, further entering the contraction zone.

The ISM manufacturing new orders index fell to 44.6, the lowest level in 15 months; output declined further, with the production sub-index falling to 44.8; export orders also shrank at the fastest rate since the beginning of the year; despite the sluggish orders, manufacturers are facing rising input prices, which may be due to soaring freight rates.

Falling orders and a continued decline in backlogs are weighing on production and suggest the manufacturing sector is struggling. Although the ISM factory employment index contracted for the third straight month, the pace slowed, with the employment sub-index rising to 46.0.

Rising borrowing costs and uncertainty surrounding the November presidential election have prompted some companies to delay capital spending and hiring. Still, markets expect the Federal Reserve to start cutting interest rates later this month, which should provide some relief.

Notably, the sub-index measuring prices paid by manufacturers rose to 54.0 from 52.9 in July, suggesting that goods deflation may be over for now but may not have a substantial impact on slowing inflation.

Costs also remain a headache. The ISM raw materials price index rose to a three-month high of 54 in August from 52.9. After falling for most of 2023, the input cost measure has shown rising prices every month this year.

One positive development in the latest ISM data is that manufacturers’ customers are managing their inventory levels better. Customer inventory indicators have been showing a decline in inventories since late last year.

Article forwarded from: Jinshi Data