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The seasonally adjusted S&P Global US Manufacturing
Purchasing Managers' Index™ (PMI™) posted 51.5 in August,
down from 52.2 in July to the lowest since July 2020.
We look beyond the survey's headline index to provide more color
on the health of US manufacturing, with is undergoing a period of
falling demand, inflation and ongoing supply constraints, which are
driving output lower and leading to a greater reluctance to invest
in machinery and labor.
More positively, supply chain delays moderated in August, and
price pressures fell to the lowest for one and a half years.
Output down for second straight month
The PMI survey's Output Index showed US factory production
having dropped for a second month running in August, with the New
Orders Index meanwhile indicating that demand for goods has now
fallen for three straight months.
Barring the initial pandemic lockdown months, this is the
steepest downturn in US manufacturing signalled by the PMI since
the global financial crisis in 2009. Forward-looking indicators
such as the orders-inventory ratio suggest that the downturn has
further to run.
Companies blamed a variety of factors for the deterioration in
demand, including the ongoing impact of soaring inflation, supply
constraints, rising interest rates and growing uncertainty about
the economic outlook.
Reluctance to invest and expand
Worryingly, the sharpest drop in demand was recorded for
business equipment and machinery, which points to falling
investment spending and heightened risk aversion. At 44.7, the New
Orders Index for producers of investment goods such as plant and
machinery was the lowest since comparable data were first available
in late-2009, excluding the first pandemic lockdown months of
early-2020.
Similarly, payroll growth slowed close to stalling, reflecting a
growing reticence to expand workforce numbers in the face of the
deteriorating demand environment. August's Employment Index was the
second-lowest for just over two years and, at 51.1, well below the
average of 53.0 seen so far during the recovery.
Supply delays moderate
Falling demand for raw materials has, however, taken pressure
off supply chains and helped shift some of the pricing power away
from sellers towards buyers.
Although vendor performance deteriorated again in August as
transportation and logistics issues remained evident, the
lengthening of average supplier lead times was the smallest since
October 2020.
With supply constraints having acted as a major cause of higher
prices during the pandemic, this easing of supply delays has led to
a commensurate cooling of price pressures. Average input costs paid
by producers rose in August at the slowest rate since January 2021,
reflecting this partial shift in pricing power away from sellers
towards buyers.
Inflationary pressures ease
Although still elevated by historical standards, the survey's
inflation gauges measuring both input costs and selling prices are
now at their lowest for one and a half years, which should help to
bring consumer price inflation down in the coming months.
The manufacturing PMI's Input Cost Index, for example, exhibits
an 86% correlation with the annual change of consumer prices in the
US, with the PMI acting with a lead of two months.
Clearly, the inflation outlook will also depend on service
sector inflation rates and the volatile energy market in
particular, but the feeding through of lower supply-related cost
pressures in manufacturing undoubtedly bodes well for the inflation
outlook in coming months.
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
