September 3, 2024
The Institute for Supply Management’s index of conditions in the manufacturing sector rose 0.4 point in August to 47.2 after having declined 1.7 points in July. While 50.0 is the breakeven point for the manufacturing sector, a level of 42,5 is generally regarded as the breakeven point for the economy as a whole. A level of 47.2 is associated with a GDP increase of 1.3%. Our GDP forecast for the second half of the year is for growth that averages 1.3%.
The ISM organization does a similar survey for the services sector. The ISM index of conditions in the service sector for August will be released on Thursday, September 5.
The Institute for Supply Management Chair for the Survey Committee Timothy Fiore said, “Demand remains subdued, as companies show an unwillingness to invest in capital and inventory due to current federal monetary policy and election uncertainty. Production execution was down compared to July, putting additional pressure on profitability. Suppliers continue to have capacity, with lead times improving and shortages not as severe. Sixty-five percent of manufacturing gross domestic product (GDP) contracted in August, down from 86 percent in July. The share of manufacturing sector GDP registering a composite PMI® calculation at or below 45 percent (a good barometer of overall manufacturing weakness) was 33 percent in August, a 20-percentage point improvement compared to the 53 percent reported in July. Two of the six of the largest manufacturing industries — Food, Beverage & Tobacco Products; and Computer & Electronic Products — expanded in August, compared to none in July,”
Comments from respondents include the following:
- “A noticeable slowdown in business activity. Staffing and production rationalization has been triggered. Previous optimism about future growth has been dashed.” [Chemical Products]
- “Backlog has dropped in half as invoicing remains strong, but orders have slowed significantly. Hoping to see orders pick back up for the fourth quarter and into 2025 but expect third quarter to remain slow for incoming orders.” [Transportation Equipment]
- “After a slow start and lower year-over-year sales volume during the first half of the year, we are now seeing a mild increase in year-over-year sales volume, along with more steady growth.” [Food, Beverage & Tobacco Products]
- “Business outlook is good. Recovery from the electronics slowdown is strong for the second half of the year.” [Computer & Electronic Products]
- “New order intake is sluggish at best. Interestingly, even though orders are down, inquiries are up. Customers have indicated capital has been approved for equipment purchases, but they were directed to put projects on hold until the fourth quarter of 2024. This indicates the uncertainty around the election. We anticipate a strong end of the year, with a rise in backlog going into 2025.” [Machinery]
- “Our order levels are on a slow, steady decline; it looks like the trend will continue through the end of the year. We are downsizing through attrition and not hiring backfills, but there have been no layoffs to date. The bright spot is a few customer programs have helped increase orders for parts, resulting in some production areas to be very busy while others have little work. Redeploying people where we can.” [Fabricated Metal Products]
- “New orders continue to be strong, and inventories are slightly down as a result. Supplier lead times seem to be creeping back up in certain categories.” [Miscellaneous Manufacturing]
- “Business is cooling down, and we don’t expect a rebound until after the election is over. As we build our 2025 budget, we continue to have deep concerns about the added environmental costs on energy.” [Paper Products]
- “Order book remains strong for now. We are preparing for a slowdown in U.S. auto sales. We are running overtime to keep pace, as hiring hourly employees has been difficult. Some walk off the job within hours because they cannot handle factory work.” [Primary Metals]
- “High interest rates are curtailing consumer spending on large discretionary spending for furniture, cabinetry, flooring and decorative trim, which has affected our industry sales potential. At the same time, pent-up demand seems to be growing for housing and remodeling. Interest rate cuts may not happen soon enough to have an impact this year.” [Wood Products]
The orders component fell 2.8 points in August to 44.6 after having declined 1.9 points in July . Basically, they are bouncing around in a range from 45.0 to 50.0. . Fiore noted that “Of the six largest manufacturing sectors, only one (Computer & Electronic Products) reported increased new orders. Panelists noted a continued level of uncertainty and concern about a lack of new order activity — with a 1-to-1.6 ratio of positive comments versus those expressing concern — and their confidence in the future economic environment remains at its lowest levels since the coronavirus pandemic recovery,”
The production component fell 1.1 points in August to 44.8 after having declined 2.6 points in July. Fiore said that, “Panelists’ companies reduced output levels compared to July. New order rates remain weak, and backlog levels continue to decline. Companies continue to avoid investing in inventory due to the current economic uncertainty,” An index reading above 52.2 is generally consistent with an increase in industrial production.Thus, industrial production is likely to decline in August.
The delivery performance of suppliers to manufacturing organizations fell 2.1 points in August to 50.5 after having risen 2.8 points in July. This means that supplier deliveries were marginally slower in August . This is the second month of slower deliveries after four consecutive months of faster deliveries. Fiore noted that, “Supplier deliveries are stabilizing as panelists’ companies continue to rely on their suppliers to manage their purchased material inventories, putting strain on the supply chain,”
The employment index rose 2.6 points in August to 48.3 after having plunged 5.9 points in July . The July and August readings are among the four lowest recorded since the index registered 43.7 percent in July 2020, early in the economic recovery; the others are 45.9 percent in February and 45 percent in July 2023. Fiore noted that,“The index contracted for the third consecutive month after an expansion in May, which broke a seven-month streak of contraction. Of the six big manufacturing sectors only Food, Beverage & Tobacco Products expanded employment in August, primarily due to seasonality factors. Respondents’ companies are continuing to reduce head counts through layoffs, attrition and hiring freezes. Sentiment in August indicated continued staff reductions compared to July, supported by the approximately 1-to-1.2 ratio of hiring versus head-count reduction comments.” An employment index above 50.3 is generally consistent with an increase in the BLS data on manufacturing employment.
The backlog of orders rose 1.9 points in August to 43.6 after having been unchanged in July. Fiore noted that, “The index remained in contraction in August, as lower new order and production rates were insufficient to allow backlogs to grow.
Customer inventory levels rose 2.6 points in August to 48.4 after having fallen 1,6 points in July. Fiore said that, “Customers’ inventory levels decreased at a slower rate in August, with the index moving upward to approach the lower end of ‘just right’ territory. This means panelists are reporting their companies’ customers have adequate (or just right) amounts of their products in inventory compared to the previous month, suggesting a demand level that is typically neutral for future new orders and production,”
With a decline in the orders index in the orders index and a smaller decline in customer inventories the ratio of orders to inventories fell 0.1 in August to 0.9. The 0.9 level for this index suggests that production could be relatively unchanged in the months ahead.
The prices paid component rose 1.1 points in August to 54.0 after having climbed 0.8 point in July. Fiore noted that, “The Prices Index indicated expansion in August, at a faster rate compared to the previous month. Commodity prices continue to be volatile, especially oil, natural gas, aluminum, corrugate, freight transportation and plastic resins. Steel prices remain at historical lows. Twenty-one percent of companies reported higher prices in August, compared to 23 percent in July,”
We expect GDP to climb at a 1.0% pace in the third quarter followed by 1.6% growth in the fourth quarter. These grow rates compared to growth rates of 1.4% and 3.0% in the first two quarters of the year. The economy seems to be slowing down slightly which seems consistent with this report on activity in the manufacturing sector.
Stephen Slifer
NumberNomics
Charleston, S.C.
Follow Me