ISM Report: US Manufacturing Contracts for First Time in Three Years

U.S. factory activity unexpectedly contracted in August for the first time in three years as shrinking orders, production and hiring pushed a widely followed measure of manufacturing to its lowest level since January 2016.

The Institute for Supply Management's purchasing managers index fell to 49.1 in August, weaker than all forecasts in a Bloomberg survey of economists, data released Tuesday showed. Figures below 50 signal the manufacturing economy is generally contracting. The group's gauge of new orders dropped to a more than seven-year low, while the production index shrank to the weakest level since the end of 2015.

Key Insights

• The latest downturn underscores how slowing global growth and an escalating U.S. trade war with China are taking an even bigger toll on domestic producers. Although manufacturing only makes up about 11% of the economy, there are concerns that entrenched weakness -- and any layoffs that may result -- could filter through to the rest of the economy and endanger the record-long expansion. 
• Manufacturing is technically already in a recession in the U.S. with a Federal Reserve measure of output declining in two consecutive quarters. The malaise is consistent with developments in the sector around the world. By one measure, global factory activity has declined 15 straight months and contracted in the last three. 
• The ISM's measure of new orders, which are tracked by some as a leading indicator of a downturn, declined to 47.2. It was the first time since December 2015 that the gauge fell below 50. ISM's production gauge also sank below that mark, to 49.5 in August from 50.8. 
• The slump in demand and output spilled over into the labor market as the ISM's gauge of factory employment fell to 47.4, the lowest level since March 2016. That suggests this Friday's employment report will show weakness in August manufacturing payrolls, which were surprisingly robust the previous two months. 
• A measure of export orders, a proxy of overseas demand, sank to 43.3, the lowest reading since April 2009 during the depths of the last recession.
• A separate factory PMI from IHS Markit came in at 50.3 on Tuesday, showing manufacturing was barely expanding. 
• The ISM's index of prices paid showed raw materials prices decreased for a third consecutive month, albeit at a slower pace in August, reflecting waning demand. 
• A gauge of supplier deliveries decreased to 51.4, indicating companies were having little difficulty meeting demand. Readings below 50 indicate faster deliveries, while those above 50 signal slowing. 
• Order backlogs also contracted in August for a fourth month.