If you are just getting back from summer vacation or if you have been somewhat laggard in catching up with developments occurring over the past two weeks, we would especially call reader attention to the August 2016 Manufacturing ISM® Report on Business®. The report is the widely recognized indication of production and supply chain activity levels across the United States and the latest report should set off some alarm bells.
The overall PMI was reported as 49.4 percent in August a decrease of 3.2 percentage points from the July reading and an overall reflection of contracting supply chain activity. By comparison, the overall average for Q2 was 51.8 percent while the average for Q1 was 49.6 percent.
The U.S. was generally viewed as one of the more robust areas of supply chain activity among developed nations. Our prior alarm for U.S. PMI levels was in April of 2015 when lingering problems from the U.S. west coast port disruption impacted overall production. The March 2015 PMI value of 51.5 indicated the fifth consecutive month of decline and the lowest reading since May 2013.
The August ISM reading is below that of the Caixin China PMI reading of 50 percent recorded for the same month, an indication that China ‘s activity surpasses that of the U.S.
More concerning in the August ISM numbers was the New Orders Index registering a 7.8 percentage point decline from July levels. Similarly, the Production Index declined by 5.8 percentage points in a single month while Backlog of Orders declined by 2.5 percentage points. Each of these indices is a reflection of future supply chain activity. Inventories were reported steady with just a 0.5 percentage point drop.
Of the 18 manufacturing industries tracked, only 6 reported growth levels mostly in consumer products sector, the perceived primary engine of current U.S. economic activity.
We trust that the U.S. August PMI indices may be attributed to summer slowdown or production shutdowns due to an unusually hot summer period. However, if the September and subsequent Q4 activity levels reflect continued contraction levels, that would be of special concern for U.S. and global based manufacturers.