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US manufacturing sector growth hits 14-year high, but tariff worries persist

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US manufacturing sector growth hits 14-year high, but tariff worries persist

Growth in the U.S. manufacturing sector unexpectedly rebounded in August, hitting a 14-year high as new orders and production increased sharply, although tariffs remained a concern among businesses, according to latest survey data from the Institute for Supply Management.

The closely watched ISM purchasing managers index rose to 61.3% last month from 58.1% in July, with growth reported in 16 of 18 manufacturing industries. Econoday expected the index to fall to 57.7%.

New orders climbed to an index reading of 65.1% from 60.2% in July, and the production index rose to 63.3% from 58.5%.

In addition, the measures for employment, supplier deliveries and inventories all registered gains in August, ISM reported, while the prices index slipped, indicating higher raw materials prices for the 30th straight month.

"Respondents are again overwhelmingly concerned about tariff-related activity, including how reciprocal tariffs will impact company revenue and current manufacturing locations. Panelists are actively evaluating how to respond to these business changes, given the uncertainty," said Timothy Fiore, chair of the ISM manufacturing business survey committee.

The ISM manufacturing index is now at its highest reading since May 2004, a level that buttresses the case for two more interest rate hikes by the Federal Reserve this year, according to James Knightley, chief international economist at ING Economics.

"[I]t suggests that U.S. business is weathering the protectionist storm for now, reinforcing our view that the Fed will hike rates again in both September and December," Knightley wrote in a research note.

Meanwhile, the seasonally adjusted IHS Markit final U.S. manufacturing PMI fell to 54.7 in August, a nine-month low, from 55.3 in July. The final number came in slightly above the initial reading and the Econoday consensus forecast of 54.5.

Output across the goods-producing sector expanded at its softest pace in 11 months. New business also increased at a slightly slower rate, with some manufacturers reporting lackluster client demand compared to the start of 2018.

"Exports remain the key source of weakness for producers, with foreign orders barely rising in August after two months of modest declines," said IHS Markit chief business economist Chris Williamson.

According to IHS, manufacturers signaled a marked increase in input costs due to new trucking regulations, supply shortages and higher raw material prices partly driven by tariffs.

"Tariffs and trade wars were also commonly cited as factors behind companies building safety stocks of inputs to ensure supply or lock-in lower prices, exacerbating supply shortages and also driving prices even higher," said IHS Markit chief business economist Chris Williamson.

Williamson said 64% of companies reporting higher input prices specifically blamed tariffs for the increased costs.

A reading above 50 or 50% in both ISM and IHS Markit surveys indicates expansion.