The Manufacturing Sector Sees Slower Demand, Falling Production, Declining Employment
“The wheels on the bus go ’round and ’round,” sings Kamala Harris, before breaking out into her signature laughter, in a video that is often passed around on social media.
Unfortunately, the wheels on the U.S. manufacturing sector are not going around and around. They appear to be coming off altogether.
The Institute for Supply Management‘s August read of the U.S. manufacturing sector, derived from a survey of so-called purchasing managers, came in worse than expected. The sector contracted for the fifth straight month, the 21st contraction in the last 22 months.
The index tracking new orders—a key measure of demand—fell 2.8 percent in August from July, and the production index declined as well. Customer inventories are seen as “just right,” which is actually a bearish indicator for future orders and production because it means inventories are not set to expand. Employment fell, albeit at a slightly slower pace than the previous month.
“Demand remains subdued, as companies show an unwillingness to invest in capital and inventory due to current federal monetary policy and election uncertainty,” Timothy Fiore of the Institute for Supply Management (ISM) explained.
It is surprising that “current federal monetary policy” is holding back investment in capital and inventory because the Fed has made it clear for several weeks that it is going to cut rates. The yield on the 10-year Treasury is down around 44 basis points since the end of July, which effectively means that the Fed rate cut has already happened for the purposes of the long end of the curve that most drives business borrowing costs.
Echoes of the Global Financial Crisis
While we’re used to seeing grim news for manufacturing from the ISM report, this month it was joined by a report showing contraction from S&P Global. S&P’s PMI found that production fell for the first time in seven months as companies scaled back output amid signs of weak demand.
Chris Williamson, chief business economist at S&P Global, had this dire analysis:
“A further downward lurch in the PMI points to the manufacturing sector acting as an increased drag on the economy midway through the third quarter. Forwardlooking indicators suggest this drag could intensify in the coming months.
Slower than expected sales are causing warehouses to fill with unsold stock, and a dearth of new orders has prompted factories to cut production for the first time since January. Producers are also reducing payroll numbers for the first time this year and buying fewer inputs amid concerns about excess capacity.
The combination of falling orders and rising inventory sends the gloomiest forward-indication of production trends seen for one and a half years, and one of the most worrying signals witnessed since the global financial crisis.”
The official analysis of the PMI reports typically goes out of its way to avoid overt political interpretation but this month’s commentary from industry makes it clear that worries about a Kamala Harris victory are depressing demand. Keep in mind that one of the biggest new sources of “uncertainty” around the election has been Harris’s rise in the polls following the successful campaign to pressure Joe Biden to drop out of the race.
“Business is cooling down, and we don’t expect a rebound until after the election is over. As we build our 2025 budget, we continue to have deep concerns about the added environmental costs on energy,” a paper products executive told ISM.
“New order intake is sluggish at best. Interestingly, even though orders are down, inquiries are up. Customers have indicated capital has been approved for equipment purchases, but they were directed to put projects on hold until the fourth quarter of 2024. This indicates the uncertainty around the election. We anticipate a strong end of the year, with a rise in backlog going into 2025,” a machinery products executive said.
“A noticeable slowdown in business activity. Staffing and production rationalization has been triggered. Previous optimism about future growth has been dashed,” said a chemicals manufacturing executive.
While some may take comfort in the fact that cuts from the Fed are looming, it’s not clear that an easing of monetary policy would be enough to offset the economic drag of a Harris administration.