According to the latest survey by the Institute for Supply Management (ISM), US manufacturing activity continued to contract at a moderate pace in August.
Despite some improvement in employment within the sector, a further decline in new orders and a rise in inventory levels suggest that factory activity may remain subdued soon.
The ISM’s manufacturing Purchasing Managers’ Index (PMI) increased slightly to 47.2 in August from 46.8 in July, the lowest level since November.
A PMI reading below 50 indicates contraction in the manufacturing sector, which makes up 10.3 percent of the US economy. Although the PMI has remained below the 50 threshold for five consecutive months, it still sits above the 42.5 level that typically signals overall economic expansion over time.
Five manufacturing industries, including primary metals, furniture, and computer and electronic products, reported growth in August. However, 12 industries, including machinery, textile mills, and transportation equipment, continued to experience contraction.
The ISM survey also revealed that manufacturers still face higher input prices, with price pressures rising modestly to the highest level in three months. Despite this, analysts do not expect these pressures to derail the Federal Reserve’s anticipated interest rate cut.
Conrad DeQuadros, senior economic advisor at Brean Capital, noted that input price pressures have increased but are not high enough to halt the ongoing slow disinflation, leaving room for a potential 25 basis point rate cut in September.
The PMI’s continued contraction and mixed regional factory surveys have raised concerns about the manufacturing sector’s resilience.
However, so-called hard data on manufacturing production and business spending on equipment suggest that the sector has been largely stable despite significant interest rate hikes by the Federal Reserve.
The Federal Reserve is widely expected to begin its easing cycle with a rate cut at its upcoming policy meeting on September 17-18. The central bank seeks to balance the need for economic stimulus with ongoing inflation concerns.
