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The Institute for Supply
Management‘s (ISM) monthly sentiment survey of U.S. manufacturers reflected slower
contraction in the sector during August. The PMI
registered 47.6%, up 1.2 percentage points
(PP) from July’s reading. (50% is the breakpoint between contraction and expansion.) ISM’s manufacturing survey represents under 10% of
U.S. employment and about 20% of the overall economy. All subindexes remained at
or below 50; the largest changes occurred among prices paid (+5.8PP), employment
(+4.1PP), and slow deliveries (+2.5PP).
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Concurrent
activity in the services sector -- which accounts for 80% of the economy and 90%
of employment -- accelerated (+1.8PP, to 54.5%). Order backlogs (-10.3PP),
inventories (+7.3PP), and inventory sentiment (+4.9PP) exhibited the largest
changes.
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Of
the industries we track, Real Estate and Construction expanded. Respondent
comments included the following --
Construction. “Sales on a national level have been strong.
Commodity material prices remain stable, and we are finding areas for cost
reductions. Material availability has returned to pre-COVID-19 levels.”
Paper
Products. “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.”
Real
Estate, Rental & Leasing. “Overall
conditions seem quite good, although there is definite slowdown in residential
construction driven by rapidly increasing interest rates.”
Changes
in S&P Global‘s survey
headline results were opposite those of ISM’s. Details from S&P Global’s
surveys follow --
Manufacturing. Sharper contraction of U.S. manufacturing sector in
August.
Key findings:
* Faster decline in new orders pulls output lower
* Slowest rise in employment since January
* Inflationary pressures remain modest despite ticking higher
Services. Service sector demand falters sparking weakest
growth in activity for seven months.
Key findings:
* Renewed decline in new business
* Cost burdens rise at faster pace but selling price inflation slows
* Employment growth weakest since October 2022
Commentary
by Chris Williamson, S&P Global’s chief business economist --
Manufacturing. “U.S. manufacturers reported another tough month of
trading in August. Output has fallen back into decline after a brief respite in
July amid an increasingly steep deterioration in order books. Orders are in
fact falling faster than factories are cutting output, suggesting firms will
need to continue scaling back their production volumes into the near future.
“An
increasing sense of gloom about the near-term outlook has meanwhile hit hiring
and led to a further major pullback in purchasing activity.
“The
survey meanwhile adds to evidence that the deflationary impact of improving
supply chains has peaked, with prices starting to rise at an increased rate
again in August. However, falling demand is clearly continuing to dampen
pricing power and is keeping overall inflationary pressures in the
manufacturing sector very subdued.
“Policy
initiatives such as the CHIPS and Science Act and IRA should start to help buoy
production in the medium term as capacity in U.S. manufacturing is expanded. A
shifting of the inventory cycle toward restocking should also be evident by the
end of the year, given improvements in some survey metrics such as the
orders-inventory ratio. However, such rays of hope remain currently overshadowed
by business confidence turning lower, which indicates that producers anticipate
some further near-term headwinds to any manufacturing revival.”
Services. “The survey data send a hint of rising stagflation
risks, as stubborn price pressures are accompanied by a near-stalling of
business activity.
“The
PMI numbers for the third quarter so far point to a faltering of economic
growth after a robust second quarter, as a renewed manufacturing downturn is
accompanied by a deteriorating picture in the service sector.
“While
a post-pandemic revival of travel, recreation and hospitality spend contributed
to an improved economic performance in the spring and early summer, this
tailwind is losing momentum. Companies increasingly report customers to have
become reticent to spend amid gloomier prospects as higher interest rates and
the increased cost of living take their toll. However, financial services and
business services providers are also increasingly feeling the pinch from
weakening demand.
“Persistent
wage growth is meanwhile being accompanied by renewed upward pressure on
energy, fuel and transport costs, as well as some broader firming of materials
prices, driving cost growth higher. Competitive forces have kept a lid on
selling price inflation, but the rate of increase of service sector charges
remains elevated to the extent that consumer price inflation is likely to
remain stubbornly above the Fed’s target in the coming months.
“The
key data to watch in the coming months will be the degree to which any further
waning of demand for services translates into lower pricing power and reduced
inflation.”
The foregoing comments represent the
general economic views and analysis of Delphi Advisors, and are provided solely
for the purpose of information, instruction and discourse. They do not
constitute a solicitation or recommendation regarding any investment.
