Weak ISM Manufacturing Report
Many investors were too pessimistic about the July ISM manufacturing PMI and slightly too optimistic about the August report. It’s possible that this ISM PMI is slightly too negative, but that misses the point.
Manufacturing sector is in a slowdown and possibly a recession. This report gives us confirmation of what we saw in the July industrial production report. I expect further weakness in that August reading.
As you can see from the chart below, the ISM PMI fell from 51.2 to 49.1 in August which missed estimates for 51.3. It missed the low end of the estimate range which was 50.5. As you can see, it is below breakeven for the manufacturing sector, but not for the overall economy.
This PMI is consistent with 1.8% GDP growth which is about in line with estimates. Consensus is 2%. Issue is that this is the first contraction since August 2016 and the worst PMI since January 2016. It’s a weak reading for a usually optimistic index.
On the other hand, it’s far from being consistent with an overall recession. This report doesn’t change my view that the overall economy is in a slowdown rather than a recession.
Details Of The ISM PMI
Interestingly, this is the 5th sequential monthly decline in the PMI. The index has been going in one direction for a while. This streak came as a slight surprise to me because we have seen some estimate beats along the way. The index is down 19.9% year over year which is worse than the trough in the last slowdown where it fell 17.2% yearly. That doesn’t mean this manufacturing recession is worse than that one to be clear.
I think this will be a broader decline which doesn’t have individual groups cratering like in the last slowdown. The energy segment of manufacturing won’t decline as badly because oil prices have recently been stable. However, the global slowdown and the tariffs are leading to broad weakness.
As you can see from the chart below, almost 60% of manufacturing industries had a yearly decline in production. That’s already almost as bad as the last weak period even though manufacturing production isn’t declining nearly as much.
Differences between the new orders index and the inventories index stayed positive which continues to be a bad sign. New orders index fell from 50.8 to 47.2 and inventories index increased from 49.5 to 49.9. It’s terrible to see declining new orders and inventories basically flat. Discounting will need to make up for the weakness in demand. New orders index was the worst since 2009.
Production index fell 1.3 points into contractionary territory as it was 49.5. Employment index fell 4.3 points to 47.4 which could mean there won’t be positive manufacturing job creation in the BLS report this Friday.
As you can see from the chart below, the new export orders index fell from 48.1 to 43.3 which was the lowest reading since April 2009. This index is probably the most related to the trade war, explaining why it is crashing more than the overall index.
ISM Comments
It’s no surprise the comments in the ISM report were weak and referred to the trade war. 4 of the 10 comments mentioned tariffs. A chemical products firm stated, "While business is strong, there is an undercurrent of fear and alarm regarding the trade wars and a potential recession."
We haven’t seen many firms using the ‘r word’ (recession) often, so this is significant. For many manufacturing firms this might feel like a recession, but that doesn’t mean a recession is here. A miscellaneous manufacturing firm stated, "Generally, business remains steady. However, we continue to plan for a hard Brexit and a long trade war between the U.S. and China." This is the problem with uncertainty. Businesses need to plan for the worst instead of making aggressive investments which grow the economy.
Weak Markit PMI
Relative to the ISM manufacturing report, the Markit PMI was ok, but it was still pretty weak. The August PMI was 50.3 which rose 0.4 from the flash reading, but fell 0.1 from July.
As you can see from the chart below, it has never fallen below 50 in this expansion. It just barely continued that streak in this report. It was still the lowest reading of this expansion. New export orders were weak like the ISM report as they fell to a 10 year low.
Production index increased slightly, but it increased because backlogs were being worked off not because of weak demand. Even though it increased, it was still one of the worst readings in the past 3 years. Auto industry was once again blamed for weakness. Motor vehicle sales report comes out on Wednesday. I’m expecting weakness because of this PMI reading. Consensus is for 16.8 million vehicles sold in August which is the same as July.
Getting back to the Markit report’s details, output expectations hit a new record low. Global slowdown is hurting confidence. This PMI is consistent with manufacturing production falling at a 3% annualized rate. Manufacturing is expected to weigh on Q3 GDP growth. That’s not a disaster though as the consumer has been strong.
Yearly Construction Spending Falls
To match the weak manufacturing PMIs, the July construction spending report missed estimates. There was 0.1% monthly growth instead of 0.3% growth. However, the good news is the June reading had a positive revision. The index had -0.7% growth instead of -1.3% growth. Even still, yearly growth fell from -2% to -2.7%.
Finally, residential spending wasn’t terrible on a monthly basis as it had 0.6% growth. However, that didn’t save yearly growth which was still -6.6%. Spending on new single family homes was up 1.4% monthly and down 8.5% yearly.
Spending on multi-family homes was the reverse as monthly growth was -1.4% and yearly growth was 5.7%. Non-residential spending was weak as monthly growth was -0.3% and yearly growth was 0.1%. Commercial building spending fell 16.5% yearly and manufacturing building was up 3.3%. Finally, public construction spending growth was 4%. State and local spending was up 3.5% and Federal spending was up 9.8%.
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