The month of August has the distinction of being the worst month –so far -- for manufacturing since July 2009. Today, the Institute of Supply Management (ISM) reported manufacturing contracted for the third consecutive month in August, reaching an index level of 49.6 percent. (A level over 50 indicates growth; under 50 means contraction.) August’s index fell 0.2 percent from July’s level of 49.8 percent.
Comments from the ISM’s panel, made up of purchasing executives, generally reflect a slowdown in orders and demand, with continuing concern over the uncertain state of global economies. Of the 18 industries the ISM tracks, eight reported contraction in August, including Computer and Electronic Products; and Electrical Equipment, Appliances, and Components.
The forward-looking New Orders Index registered 47.1 percent, a decrease of 0.9 percentage point from July, indicating contraction in new orders for the third consecutive month. Overall, the indicators for manufacturing are discouraging: Inventories increased to 53 percent in August, which is 4 percentage points higher than the 49 percent reported in July.
“This month's reading indicates that respondents are reporting inventories are growing for the first time since September 2011,” according to the ISM. Computers and electronics were among the few categories that reported a decrease in inventories for the month.
Although manufacturing-related stocks were trading lower today, analysts are being temperate about the downward trend. According to The Wall Street Journal:
“We’re probably treading water right now,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. “The ISM is mainly a measure of sentiment, and [August’s reading] isn’t quite enough to suggest the manufacturing sector is contracting in a meaningful way. If equity prices continue to generally trend higher, and Europe continues to muddle through, the ISM is likely to rise in response to those factors.”
Curiously, although demand seems lower, prices are increasing. The overall Prices Index registered 54 percent in August, which is an increase of 14.5 percentage points compared to the July reading of 39.5 percent, ISM reports:
This is the first month the index has reflected an increase in the price of raw materials since April 2012 when the Prices Index registered 61 percent. This is also the largest month-over-month increase since September 2005, when the index increased 15.5 percentage points from August 2005.