U.S. manufacturing contracted in August for the first time since January 2016 as trade uncertainty continued to weigh on the sector.
The Institute for Supply Management’s (ISM) manufacturing Purchasing Managers’ Index (PMI), fell to 49.1 versus consensus expectations of 51.3, a meaningful decline from July’s 51.2 reading (above 50 is considered expansionary territory).
Underlying details in the report showed more weakness could be ahead. ISM’s new orders sub-index, which tends to act as a leading indicator for manufacturing health, fell to 47.2. That’s one of the lowest readings of the cycle, as shown in LPL Research’s Chart of the Day, New Orders Drop Amid Trade Uncertainty. Export orders in particular fell sharply, reflecting the impact of weakening global demand amid the trade dispute. Markit’s manufacturing PMI, a competitor to ISM’s gauge, remained in expansionary territory at 50.3.
While manufacturing plays a smaller role in the economy than it once did, it remains a bellwether for corporate profits and economic growth. Despite manufacturing weakness, consumer spending, continues to show strength, supported by low unemployment, solid wage gains, and slowing (but still near trend) economic growth. Manufacturing weakness is a growing concern, but is not in itself a recession signal. In fact, the ISM PMI signaled contraction in 2012, 2013, 2015, and 2016, but in each case the expansion endured.
“While U.S. manufacturing sits near flat, it remains more resilient than most other developing economies,” noted LPL Financial Chief Investment Strategist John Lynch. “Manufacturing is unlikely to improve without meaningful progress on trade, but fiscal incentives remain in place to encourage investment. In the meantime, a supportive environment for consumer spending continues to support economic growth.”
Please see the Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets for additional description and disclosure.
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