U.S. manufacturing activity showed continued signs of weakness in August, heightening concerns about the broader economic outlook, according to recent manufacturing reports.
The Institute for Supply Management’s (ISM) monthly survey of purchasing managers revealed that only 47.2% of respondents reported expansion, falling short of the 50% breakeven point. Although this figure represents a slight improvement from July’s 46.8%, it remains below the Dow Jones consensus estimate of 47.9%.
Timothy Fiore, Chair of the ISM Manufacturing Business Survey Committee, noted, “While the manufacturing sector remains in contraction, the pace of contraction has slowed compared to last month. Demand remains weak, output has declined, and input costs remain manageable.” Fiore also highlighted that companies are hesitant to invest in capital and inventory due to current federal monetary policy and political uncertainty.
Despite the contraction, Fiore indicated that any reading above 42.5% generally suggests overall economic expansion. However, the weaker-than-expected data has already contributed to market volatility, with the S&P 500 experiencing a significant drop of approximately 8.5% before recovering some losses. The latest ISM report led to further declines, with the Dow Jones Industrial Average falling nearly 500 points.
The disappointing manufacturing data increases the likelihood that the Federal Reserve may consider a rate cut later this month. Following the ISM report, traders adjusted their expectations, raising the probability of a more substantial half-point rate reduction to 39%, according to CME Group’s FedWatch measure.
Additionally, S&P Global’s Purchasing Managers’ Index (PMI) mirrored this trend, falling to 47.9 in August from 49.6 in July. The S&P employment index also saw its first decline of the year, and input costs surged to a 16-month high, suggesting persistent inflation.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, commented, “The further decline in the PMI indicates that the manufacturing sector is increasingly dragging on the economy, with forward-looking indicators suggesting the situation could worsen in the coming months.”
The ongoing weakness in manufacturing highlights potential challenges for the U.S. economy as it navigates through a period of heightened uncertainty and inflationary pressures.
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