S&P Global US Manufacturing seasonally adjusted Purchasing Managers Index™ (PMI™) posted 51.5 in August, compared to 52.2 in July at the lowest since July 2020.
We look beyond the survey stock index to provide more color on the health of the US manufacturing industry, which is going through a period of falling demand, inflation and persistent supply constraints, which are lowering production and leading to greater reluctance to invest in machinery and labor.
More positively, supply chain delays eased in August and price pressures fell to their lowest in a year and a half.
Production down for the second consecutive month
The PMI survey’s production index showed US factory output fell for a second straight month in August, with the new orders index indicating that demand for goods has now fallen for three straight months. .
With the exception of the first months of the pandemic-related lockdown, this is the sharpest downturn in the US manufacturing sector signaled by the PMI since the global financial crisis of 2009. Forward-looking indicators such as the orders-to-stock ratio stocks suggest that the slowdown will continue.
Companies blamed a variety of factors for deteriorating demand, including the continued impact of soaring inflation, supply constraints, rising interest rates and growing uncertainty about the economic outlook.
Reluctance to invest and grow
Worryingly, the biggest drop in demand was for business equipment and machinery, indicating lower capital spending and heightened risk aversion. At 44.7, the new orders index for producers of capital goods such as plant and machinery was the lowest since comparable data first became available at the end of 2009, at the end of 2009. excluding the first months of pandemic lockdown in early 2020.
Similarly, wage bill growth has slowed to near a standstill, reflecting a growing reluctance to increase payrolls in the face of a deteriorating demand environment. August’s employment index was the second lowest in just over two years and, at 51.1, well below the 53.0 average seen so far during the recovery.
Moderate supply delays
Lower demand for commodities, however, eased pressure on supply chains and helped shift some pricing power from sellers to buyers.
Although supplier performance deteriorated again in August, with transportation and logistics issues remaining evident, the increase in average supplier lead times was the lowest since October 2020.
With supply constraints having been a major cause of rising prices during the pandemic, this easing of supply delays has resulted in a commensurate cooling of price pressures. Average input costs paid by producers rose in August at the slowest pace since January 2021, reflecting this partial shift in pricing power from sellers to buyers.
Inflationary pressures are easing
Although still high by historical standards, the survey’s inflation indicators measuring both input costs and selling prices are now at their lowest level in a year and a half, which should help lower consumer price inflation in the coming months.
The manufacturing PMI’s input cost index, for example, has an 86% correlation with the annual change in US consumer prices, with the PMI acting two months ahead.
Obviously, the inflation outlook will also depend on service sector inflation rates and volatility in the energy market in particular, but the transmission of less supply-side cost pressures in the sector manufacturing sector undoubtedly bodes well for the outlook for inflation in the months ahead.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.