September 9, 2023

The Institute for Supply Management’s index of conditions in the manufacturing sector rose 1.2 points in August to 47.6 after having risen 0.4 point in July.  After falling steadily last year the index has rebounded slightly in the past two months. A level of 50.0 is the breakeven point for expansion in the manufacturing sector, so in November of last year the manufacturing sector began to contract slightly.  At 47.6 in August the manufacturing sector continues to decline, but it is doing so at a slightly less rapid rate than in other recent months.  While 50.0 is the breakeven point for the manufacturing sector, a level of 48.7 is generally associated with a recession for the economy as a whole.   A level of 47.6 s associated with a GDP decline of 0.4%.

Right now the service sector — which is 2/3 of the economy is expanding at a 2.7% pace.  The ISM index of conditions in the service sector for August will be released on Wednesday, September 6.

The Institute for Supply Management Chair for the Survey Committee Timothy Fiore said, “The U.S. manufacturing sector shrank again, but the uptick in the PMI indicates a slower rate of contraction. The August composite index reading reflects companies managing outputs appropriately as order softness continues, but the month-over-month increase is a sign of improvement.”

Comments from survey respondents include the following:

  • “Further reductions in customer orders due to the economic situation and also their working down of own inventories. Backlog is dwindling, but still showing robust revenue.” [Computer & Electronic Products]
  • “Demand still weak. Customer inventories are getting depleted; however, we are not seeing a real uptick in demand. General supply conditions are softening.” [Chemical Products]
  • “Still seeing a slowdown in orders. We’re continuing to ship to max capacity, with supply constraints still a real part of our day-to-day business operations.” [Transportation Equipment]
  • “Customer orders have softened. This is likely due to customers’ increased confidence in the supply chain, (which) has them reducing their inventories. Customers are also being pinched with higher interest rates. Additionally, consumers are feeling their purchasing power eroded by stubbornly high inflation, so they are purchasing less.” [Food, Beverage & Tobacco Products]
  • “Fourth quarter orders falling short of projection and indicating a slowdown in customer demand, though the first quarter forecast remains solid. Unclear if this is an inventory correction. Logistics stabilized and costs are matching 2019. Shortages limited to only a few items now, but suppliers are hesitant to add or replace labor needed in light of slowing demand.” [Fabricated Metal Products]
  • “General slowdown in business at the end of the third quarter. For capital equipment additions, our customers are buying only what they need for specific jobs and not adding any capital fleet material for potential future work.” [Machinery]
  • “There is additional softening in the market. Customers are hesitant to provide extended forecasts with today’s economic uncertainty.” [Electrical Equipment, Appliances & Components]
  • “Business continues to remain strong with sales and profits both ahead of plan. The bookings were below what we planned, but that was expected due to fewer working days and summer vacations.” [Miscellaneous Manufacturing]
  • “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.” [Paper Products]
  • “Business is beginning to improve moderately. Still well below 2022 levels, but it appears that the ‘great inventory rebalancing’ is finally coming to fruition.” [Plastics & Rubber Products]
  • “Automotive volume remains strong in preparation for the United Auto Workers’ potential strike at Ford, General Motors and Stellantis. Contingency plans in place for sub-tiers. Continue to have issues recruiting general labor employees. Operational efficiency suffering due to a lack of human resources. Order book remains strong and ahead of 2022.” [Primary Metals]
  • “(The Federal Reserve’s) actions to increase borrowing costs has dampened demand for residential investment. Recently, this slowdown plateaued somewhat, with demand stabilizing. The outlook for 2024 remains uncertain, and we continue to be cautious about building inventories.” [Wood Products]

The orders component fell 0.5 point in August to 46.8 after having risen 1.7 points in July.  The index has been below 50 for twelve consecutive months which means that orders continue to decline.  They declined at a slightly faster pace in August than in July.  Fiore noted that,  “Of the six largest manufacturing sectors, only one (Transportation Equipment) reported increased new orders. New order levels contracted at a faster rate compared to July, but production was steady month to month and backlog contraction eased, signs that companies are adjusting to the new demand forecasts predicted for the balance of the year,”   A reading of 52.7 is generally consistent with an increase in the Census Bureau’s series on manufacturing orders thus durable goods orders are likely to decline in July.

The production component rose 1.7 points in August to 50.0 after having gained 1.6 points in July. Fiore noted that, “Of the top six industries, three — Transportation Equipment; Machinery; and Food, Beverage & Tobacco Products — expanded in August. Production output is being effectively managed given current new order rates, company profitability targets and the desire to slow backlog declines.”   An index level of 52.2 is generally consistent with an increase in industrial production.  Thus, industrial production is likely to continue its decline in August.

The delivery performance of suppliers to manufacturing organizations rose 2.5 points in August to 48.6 after rising 0.4 points in July.  This means that supplier deliveries were actually faster for the eleventh straight month but they were slightly less rapid than in July.  Fiore noted that “Panelists’ comments continue to indicate that suppliers’ performance is improving, in most cases. The index recorded its best performance since September 2022, when it registered 52.4 percent,”

The employment index rose 4.1 points in August to 48.5 after having fallen 3.7 points in July.   Fiore noted that, “The index indicated employment contracted for a third month after two months of expansion preceded by two months of contraction. Of the six big manufacturing sectors, two (Machinery; and Transportation Equipment) expanded. Labor management sentiment at Business Survey Committee respondents’ companies continue to indicate a slowdown in hiring, reflected by attrition, freezes and layoffs. In August, attrition was the primary source of head-count reductions; this method is slower compared to hiring freezes or layoffs, which suggests that panelists’ companies are not driven by reducing labor costs. Right-sizing workforces is the primary goal, providing companies time to manage the trajectory as near- and moderate-term demand remains uncertain,”   An index reading above 50.4 is generally consistent with an increase in the BLS data on manufacturing employment.

The backlog of orders rose 1.3 points in August to 44.1 after having climbed 4.1 points in July.  Fiore noted that, “The index remains in moderate-to-strong contraction with a third straight month of slowing contraction, the result of improvements in new order rates and panelists’ companies executing lower production levels,”

At the same time customer inventory levels was unchanged in August at 48.7 after rising 2.5 points in July.  Fiore said that, “Customers’ inventory levels are again at an appropriate tension, as panelists report their companies’ customers have the proper amount of inventory, a potential slight positive for future production,”

Both the orders index at 46.8 and customer inventories at 48.7, the ratio or orders to inventories was unchanged at 1.0 in August after having been unchanged in July.  Orders and inventories are roughly in line with where they were prior to the recession.

The prices paid component jumped 5.8 points in August to 48.4 after having risen 0.8 point in July.  Fiore noted that,  “Panelists’ comments indicate that buyers and suppliers continue to aggressively negotiate price levels as commodity markets remain moderately volatile.”   A prices index above 52.9 is generally consistent with the Bureau of Labor Statistics PPI index for Intermediate Materials.

We expect GDP to climb at a  2.7% pace in the third quarter and 1.6% in the fourth quarter of this year  GDP growth may slow sharply in the first half of next year with GDP growth of about 1.0% each quarter.

Stephen Slifer


Charleston, S.C.