Industry Market Trends

U.S. Manufacturing Shrinks for Third Month

Sep 06, 2012

The U.S. manufacturing sector contracted for the third consecutive month in August, marking the longest period of decline since the recession ended in 2009 and deepening concerns about a lingering slowdown that could drag on the overall economic recovery.

Business activity in the United States manufacturing sector decreased for the third consecutive month in August. The recent downward trend ended a three-year period of continuous growth. The rate of contraction accelerated slightly last month due to drops in demand, production and employment, reflecting difficult market conditions for manufacturing around the globe.

According to the Institute for Supply Management's (ISM) latest manufacturing Report on Business, although U.S. manufacturing shrank again in August, the overall U.S. economy grew for the 39th month in a row.

The ISM purchasing managers' index (PMI), a key monthly gauge of the factory sector, dropped to 49.6 last month, down from 49.8 in July and marking the lowest PMI reading since July 2009. Readings below 50 indicate overall contraction for the sector, meaning that manufacturing activity continued to decline through August at a faster pace than in recent months. The latest PMI figure was well-below the 12-month average of 52.2.

"The ISM report was the latest signal that two engines of the recovery - exports along with business spending on capital equipment and other investments - are running on fumes," the Wall Street Journal notes. "While some sectors, notably the housing market, have improved, the economy's inability to fire on all cylinders is a big reason why the U.S. is still plagued by slow growth and high unemployment more than three years into the recovery."

The August reading came as a surprise, as economists expected manufacturing to rebound from the prior two months' decline and return to a growth phase. Economists polled by MarketWatch had forecast the PMI to increase to 50.2 for the month.

Demand fell in August, with ISM's new orders index dropping to 47.1, down from 48 in July and continuing the three-month downward trend that began in June.

The steepest decline last month was in manufacturing output, with the production index falling to 47.2 from 51.3 in July. This marked the first contraction in production since May 2009. Employment conditions also worsened, falling to 51.6 in August from 52 in July, but remained in the growth stage, indicating that hiring is still on a modest upswing in manufacturing.

Meanwhile, exports continued to decline, with the index reaching 47 in August. This was slightly up from the 46.5 reading in July, but still indicated overall contraction in overseas demand. Manufacturers' inventories increased, jumping from 49 in July to 53 in August, and prices soared, surging from 39 to 54 last month.

"The recent ISM reports have been somewhat at odds with the more positive manufacturing output data produced by the Federal Reserve, as weather and other types of seasonal distortions have created unusual volatility in manufacturing production measures," Cliff Waldman, senior economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), said in an analysis of the report. "It is nonetheless clear that a sharply slowing global economy and policy uncertainty in the U.S. are sapping the U.S. manufacturing sector of the strength that allowed it to be a growth catalyst in the earlier quarters of recovery from the destabilizing 2007-2009 recession."

Eight of the 18 industries tracked ISM reported contraction last month: textile mills; nonmetallic mineral products; furniture and related products; computer and electronic products; electrical equipment, appliances and components; transportation equipment; fabricated metal products; and machinery.

However, there were also eight industries that posted growth in August: printing and related support activities; primary metals; food, beverage and tobacco products; petroleum and coal products; apparel, leather and allied products; paper products; chemical products; and miscellaneous manufacturing.

"Weak consumer spending and steady declines in business orders for large machinery and other capital goods are slowing factory output," the Associated Press reports. "The report followed other data showing manufacturing has slowed overseas. A measure of factory activity in China fell to its lowest level in more than three years last month. And manufacturing in Europe has also stagnated in the face of the region's financial crisis."