Workers assemble second-generation R1 vehicles at electric car maker Rivian's manufacturing facility in Normal, Illinois, USA, June 21, 2024.
Joel Angel Juarez | Reuters
According to independent production indicators, factories in the US remained in downturn mode in August, fueling fears about future economic developments.
The Institute for Supply Management's monthly survey of purchasing managers found that only 47.2% of them reported an expansion during the month, which is below the 50 percent threshold for activity.
This was slightly above the 46.8% recorded in July, but below the Dow Jones consensus forecast of 47.9%.
“Although U.S. manufacturing activity is still in contraction territory, it has declined at a slower pace compared to last month. Demand remains weak, production has declined and inputs remained accommodative,” said Timothy Fiore, chairman of the ISM Manufacturing Business Survey Committee.
“Demand remains subdued as companies are reluctant to invest in capital and inventory due to the federal government's current monetary policy and election uncertainty,” he added.
While the index level suggests a contraction in the manufacturing sector, Fiore pointed out that any reading above 42.5 percent generally indicates an expansion in the overall economy.
It was a weaker than expected reading last month that sent markets into a tailspin, ultimately costing the S&P 500 about 8.5% before it recovered most of its losses. Stocks extended their losses following the latest ISM release on Tuesday, with Dow Jones Industrial Average almost 500 points less.
Another weak economic report increases the likelihood that the Federal Reserve will cut interest rates by at least a quarter of a percentage point later this month. Following the ISM report, traders raised the probability of a more aggressive cut by half a percentage point to 39%, according to the CME Group's FedWatch index.
With the survey, the employment index rose slightly to 46%, while inventories rose to 50.3%. In terms of inflation, the price index rose slightly to 54%, which may give the Fed something to think about when deciding on the extent of the fully priced rate cut.
The ISM results were underpinned by another PMI reading from S&P, which showed a decline from 49.6 in July to 47.9 in August.
The S&P employment index declined for the first time this year, while the input cost indicator climbed to a 16-month high – another sign that inflation is still present, even if well below its mid-2022 peaks.
“A further downward trend in the PMI suggests that the manufacturing sector is becoming an increasing drag on the economy midway through the third quarter. Forward-looking indicators suggest that this drag could become even stronger in the coming months,” said Chris Williamson, chief economist at S&P Global Market Intelligence.
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