U.S. Manufacturing Hits Rough Spot in Possible Warning on Growth

Can ISM Contraction Impede the Fed's Rate Path?
  • ISM index signals contraction for first time in six months
  • Burden may fall again on American consumers to drive expansion

Manufacturing unexpectedly hit a rough patch in the U.S. last month. If it remains stuck, it would again be up to American consumers to drive economic growth.

The Institute for Supply Management’s index fell by 3.2 points to 49.4 in August, the biggest drop in more than two years and signaling contraction for the first time in six months, the Tempe, Arizona-based group’s report showed Thursday. Readings above 50 indicate growth, and 11 of 18 industries surveyed by the purchasing managers’ group indicated weakening.

Data in coming months will determine whether the pullback was an aberration or an early warning that manufacturing hasn’t quite found its footing after being mired in a slump entering 2016. Meanwhile, the report raises the risk that a third-quarter growth rebound will be weaker than anticipated, and diminishes expectations that strength in the world’s largest economy will broaden beyond household spending.

“It’s one month, and there have been signs of stabilization,” said Brett Ryan, a U.S. economist at Deutsche Bank Securities Inc. in New York. “But this confirms that we’re not in a manufacturing recovery yet. We’ve stabilized, but it’s not rebounding strongly by any means.”

Global Manufacturing

U.S. Treasury yields and the dollar fell following the ISM figures. They contrast with manufacturing gauges elsewhere that were a bit more positive on Thursday: A Chinese index rose to the highest level in almost two years, U.K. factories showed resilience after the Brexit vote and a European index indicated expansion.

The chairman of the ISM manufacturing survey committee said the results might be an “anomaly” and don’t square with comments from purchasing managers or other manufacturing gauges worldwide. “We could get back on track very easily,” Bradley Holcomb said on a conference call with reporters on Thursday. Holcomb said his own “level of concern is close to zero.”

Even so, the numbers join economic data including tame inflation and weak business investment that the Federal Reserve could use to justify holding off on an interest-rate increase when officials gather later this month. At the central bank’s July meeting, policy makers were split on the urgency to raise borrowing costs.

Regional Signals

Several manufacturing surveys have shown weakness around the country. New York, Kansas City, Dallas and Richmond gauges contracted in August, while a factory index in the Chicago area declined for a second month.

More broadly, Fed officials have cited positive momentum in the economy, with Chair Janet Yellen saying last week that the “case for an increase in the federal funds rate has strengthened in recent months.” Commerce Department data on Aug. 25 showed orders for U.S. business equipment climbed for a second month in July, the first back-to-back advance since early 2015.

Other figures on Thursday showed filings for unemployment benefits were little changed in the week ended Aug. 27, holding close to four-decade lows. Large automakers missed analysts’ estimates for U.S. vehicle sales in August, increasing the odds that industrywide sales won’t extend a streak of annual gains. A report Friday is projected to show solid U.S. job gains in August, and strong data could potentially clinch a Fed interest-rate hike in September.

The drop in the ISM gauge “may be a one-off dip due to a particularly stark end-of-summer slowdown,” Tom Simons, a money-market economist at Jefferies LLC in New York, said in a research note. “We need to wait and see before drawing any conclusions about what this means for manufacturing for the remainder of the year.”

Chris Low, chief economist at FTN Financial in New York, had this takeaway: “The good news is that it is not worse.”

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