Lucia Mutikani
WASHINGTON (Reuters) – U.S. manufacturing contracted modestly in August as employment improved slightly, but a further decline in new orders and rise in inventories suggested factory activity may remain weak for some time.
A survey released Tuesday by the Institute for Supply Management also showed manufacturers continued to push back on rising raw material prices last month.It remained hoped the Federal Reserve will begin a long-awaited monetary easing cycle this month with a 25 basis point interest rate cut.
“Input price pressures edged up to three-month highs, but we judge them not to be high enough to threaten continued gradual deinflation,” said Conrad DeQuadros, senior economic adviser at Breen Capital. “Nothing prevents a rate cut in September, but there’s also nothing to pressure the Fed to cut rates by a half-point.”
The ISM said its manufacturing PMI rose to 47.2 last month after July’s 46.8 reading was the lowest since November. A PMI below 50 indicates a contraction in manufacturing, which accounts for 10.3% of the economy.
The PMI remained below the 50 mark for the fifth consecutive month, but remained above the 42.5 level that the ISM considers to indicate overall economic expansion in the longer term.
Five manufacturing industries reported growth last month, including primary metals, furniture and computer and electronic products. Machinery, textile plants, transportation equipment, electrical equipment, appliances and parts were among 12 industries that reported contractions.
However, the PMI and regional factory surveys have consistently exaggerated manufacturing weakness.
So-called hard data on manufacturing output and capital investment suggest that manufacturing is largely treading water as demand for goods has not fallen despite big interest-rate hikes by the U.S. central bank, which is expected to start cutting rates when it meets on Sept. 17-18.
Survey respondents offered mixed comments. A chemical manufacturer reported a “noticeable slowdown in business activity.” A machinery manufacturer described new orders as “slow at best.” But a general goods manufacturer said “new orders remain strong.”
Primary metals manufacturers reported that their order backlogs are “solid for now” and that they are “working overtime to keep up with orders due to difficulties in hiring hourly workers.”
Wall Street stocks fell. The dollar rose against a basket of currencies. Treasury yields fell.
Weak Order
The ISM survey’s future new orders sub-index fell to 44.6 last month from 47.4 in July.
Production fell further, with the production sub-index dropping to 44.8 from 45.9 in July, its lowest level since May 2020. ISM said the low level of production runs is “putting further pressure on profitability.”
Despite weak demand, manufacturers faced rising prices for inputs, likely reflecting higher freight rates.
The survey’s index of prices paid by manufacturers rose to 54.0 from 52.9 in July, signaling an eighth consecutive month of increases in raw materials prices, reversing eight consecutive months of declines.
This suggests that commodity deflation appears to have subsided for now, but is unlikely to have a major impact on slowing inflation. Commodity prices were flat in July after falling for two consecutive months.
The supplier deliveries index fell to 50.5 from 52.6 in the previous month. Readings above 50 indicate delays in deliveries.
Factory employment fell, but at a slower pace. The survey’s manufacturing employment index rose to 46.0 from 43.4 in July. Companies continue to reduce staffing through layoffs, attrition and hiring freezes, ISM said.
The measure is not a reliable predictor of manufacturing payrolls in the government’s closely watched jobs report.
A Reuters survey of economists said manufacturing payrolls are expected to remain steady in August after adding 1,000 in July. Total nonfarm payrolls are expected to rise by 160,000 after adding 114,000 in July.
The unemployment rate is estimated to have fallen to 4.2 percent from a three-year high of 4.3 percent in July.
Construction spending was flat in June but fell 0.3% in July as higher mortgage costs and growing supply weighed on single-family home construction, according to a second report released Tuesday by the Commerce Department’s Census Bureau. Construction spending in July increased 6.7% from a year ago.
Investment in residential construction fell 0.4%, while spending on new single-family home construction projects plummeted 1.9%. A sharp rise in mortgage rates in the spring sapped homebuilding and sales and created an inventory glut in some areas. Oversupply and weak demand have forced builders to hold off on starting new projects.
Single-family home construction fell to its lowest level in 16 months in July, with inventory approaching levels not seen since early 2008.
(Reporting by Lucia Mutikani; Editing by Paul Simao and Alexandra Hudson)
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