U.S. August ISM Manufacturing PMI came in at 47.2, below expectations, showing improvement from July. Employment is picking up and prices are rising

On Tuesday, September 3rd, the data released by ISM showed that the U.S. manufacturing index for August slightly rebounded from the eight-month low in July, with some improvement in employment, but the overall trend still indicates a sluggish manufacturing activity.

The U.S. August ISM manufacturing index was 47.2, expected at 47.5, with a previous value of 46.8 in July. In July, the ISM manufacturing PMI hit its lowest level since November last year. 50 is the dividing line between expansion and contraction.

In March this year, the U.S. ISM manufacturing index unexpectedly exceeded expectations significantly, breaking through the 50 mark to reach 50.3, ending 16 consecutive months of manufacturing contraction. However, looking at the data from the following months, the single-month expansion of the U.S. manufacturing sector was short-lived.

Although the ISM manufacturing PMI has been in a contraction trend for a long time, ISM stated that a manufacturing PMI above 42.5 usually indicates overall economic expansion in the United States. PMI and regional factory surveys continue to exaggerate the weakness in manufacturing.

Regarding the important sub-indices in August:

• The new orders index was 44.6, the worst since June 2023, with a previous value of 47.4 in July.
• The inventory index was 50.3, a significant increase of 5.8 points from the previous month, with a previous value of 44.5 in July.
• The production index further declined, dropping from 45.9 in July to 44.8.
• The employment index was 46, with a previous value of 43.4 in July. In July, this sub-index hit its lowest level since June 2020. The latest data indicates that factory employment continues to shrink, but at a slower pace.
• Manufacturers' price payment index rose from 52.9 in July to 54. Despite weak orders, manufacturers are facing rising input prices, which may reflect soaring freight costs.
• The supplier delivery index dropped from 52.6 in July to 50.5 in August, with a reading above 50 indicating slower delivery speeds.

Sub-indices convey three major signals

First is the employment index. Analysts suggest that the significant improvement in the employment index in August may indicate that Friday's non-farm employment report will be better than expected.

Second is the price payment index. This index has resumed its upward trend, with media analysis suggesting that this indicates that the current cooling of commodity inflation may have ended, but it may not have a substantial impact on overall inflation. Financial blog Zerohedge holds a similar view, believing that compared to the lagging 8-month U.S. CPI data, it can be affirmed that we have seen the low point of this cycle's CPI data.

Third is the new order/inventory ratio. The new order index for June, July, and August was 49.3, 47.4, 44.6; the inventory index was 45.4, 44.5, 50.3; the ratio between the two was 1.0859, 1.0652, 0.8867, showing a significant downward trend in the past three months. Zerohedge commented that the sudden drop in the new order/inventory ratio back to recession levels indicates that the manufacturing pipeline is severely blocked, and large-scale layoffs are imminent.

Michael Hartnett, a well-known analyst at Bank of America, previously stated that attention should be paid to the ratio of new orders to inventory, as this is the best three-month leading indicator of the ISM Manufacturing Index. Bank of America previously predicted that the ISM Manufacturing Index is expected to reach 52 in October this year, with the data set to be released on November 1.

The ISM Manufacturing PMI is the first important economic indicator released this week in the United States, and the market is closely watching it to assess whether it signals further signs of a soft landing in the U.S. economy, which may also have an impact on the Federal Reserve's September decision. The Fed is expected to start its first rate cut at the policy meeting on September 17-18.

Market Reaction

After the release of the U.S. ISM Manufacturing Index, the U.S. dollar index slightly declined to 101.64. The U.S. stock market showed minor fluctuations, with the Nasdaq falling by 1.5%. The yield on the 10-year U.S. Treasury bond experienced minor fluctuations, standing at 3.838%. Spot gold showed minor fluctuations, declining during the day to $2477.77 per ounce.

Markit Manufacturing PMI

The Markit Manufacturing PMI released earlier on the same day showed that the final value of the U.S. August Markit Manufacturing PMI was 47.9, with an expectation of 48 and a previous value of 48. The trends reflected in this Markit Manufacturing PMI are similar to those in the ISM Manufacturing PMI in many sub-indexes.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, stated:

The further decline in PMI data indicates that the drag on the economy from manufacturing has intensified in the middle of the third quarter. Leading indicators suggest that this drag may intensify in the coming months.

Sales below expectations have led to warehouses being filled with unsold inventory, a lack of new orders has prompted factories to cut production for the first time since January. Concerns about overcapacity have led manufacturers to reduce their workforce for the first time this year and cut back on purchases of inputs.

The combination of falling orders and rising inventories sends a forward-looking signal of the most pessimistic production trend in a year and a half, and one of the most worrying signals since the global financial crisis.

While the decline in demand for raw materials has eased pressure on the supply chain, reports widely indicate that rising wages and freight costs are factors pushing up input costs, which are currently rising at the fastest pace since April last year.