The Institute for Supply Management (ISM) manufacturing Purchasing Managers’ Index (PMI) inched up to 47.2 in August but remains in contraction territory for a fifth straight month. The index has now contracted for 21 of the past 22 months. The latest reading was worse than the forecast of 47.5.
Fiore continues, “While still in contraction territory, U.S. manufacturing activity contracted slower compared to last month. Demand continues to be weak, output declined, and inputs stayed accommodative. Demand slowing was reflected by the (1) New Orders Index dropping further into contraction, (2) New Export Orders Index contracting slightly faster, (3) Backlog of Orders Index remaining in strong contraction territory, and (4) Customers’ Inventories Index at the ‘just right’ level. (For more, see the Customers’ Inventories Index summary below.) Output (measured by the Production and Employment indexes) continued in moderate contraction with production sagging further, while employment contracted slower as compared to July. Panelists’ companies reduced production levels month over month as head-count reductions continued in August. Inputs – defined as supplier deliveries, inventories, prices and imports – generally continued to accommodate future demand growth, with inventory growth attributed to a supply-demand timing mismatch.
“Demand remains subdued, as companies show an unwillingness to invest in capital and inventory due to current federal monetary policy and election uncertainty. Production execution was down compared to July, putting additional pressure on profitability. Suppliers continue to have capacity, with lead times improving and shortages not as severe. Sixty-five percent of manufacturing gross domestic product (GDP) contracted in August, down from 86 percent in July. The share of manufacturing sector GDP registering a composite PMI® calculation at or below 45 percent (a good barometer of overall manufacturing weakness) was 33 percent in August, a 20-percentage point improvement compared to the 53 percent reported in July. Two of the six of the largest manufacturing industries – Food, Beverage & Tobacco Products; and Computer & Electronic Products – expanded in August, compared to none in July,” says Fiore.
Here is the table of PMI components.
The ISM Manufacturing Index is a diffusion index, meaning that a reading above 50 indicates expansion in the sector and a reading below 50 indicates contraction. Therefore, the latest reading of 7.2 indicates we are in contraction territory.
What sort of correlation does that have with the months before the start of recessions? Check out the blue dots in the chart below. The 11 recessions during this time frame are indicated along with the index value the month before the recession starts.
The month before a recession, the index has ranged between 42.1 and 66.2 with an average of 49.7, a level we currently sit below. The current level of 47.2 is at or below 9 of the 12 recessions shown above.
Here is a closer look at the series, beginning at the turn of the century.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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