Commentary Directory

The ISM Manufacturing PMI for August increased 1.2 pts to 47.6. This is the 10th straight month of decline in the US manufacturing sector, but the rate of decline is easing. The deterioration in production stopped this month with the newest reading at 50, up 1.7 pts from July. That didn’t necessarily mean that demand was improving. In fact, the decline in new orders actually worsened, dropping slightly to 46.8. Firms in general sensed that this weak demand would persist. Some direct comments provided evidence of this: “Fourth quarter orders falling short of projection and indicating a slowdown in customer demand” from a fabricated metal products firm; “General slowdown in business at the end of the third quarter. For capital equipment additions, our customers are buying only what they need” from a machinery firm. In response, the inventory contraction worsened with the index falling -2.1 pts to 44.0.

The Prices index, a subindex that has gotten a lot of attention over the past year, made a substantial move higher in August. It rose 5.8 pts to 48.4 which is the highest since April and well above expectations. The movement in the index came from a large decrease in the percentage of firms that reported lower prices, from 28.7% in July to 19.7% in August. Despite this, most of those respondents reported that prices were the same and not rising. The forces behind this move were the volatile energy markets that have been bouncing from the near-term lows as a result of a more resilient economy supporting higher demand expectations. These movements are also visible in the early CPI releases showing some reversals in the energy component. While the increase suggests some inflationary pressure is returning, it will take a Prices index of 52.9 for it to be consistent with inflationary PPI (specifically the intermediate materials subindex).