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Economic Report

Sept. 3, 2019, 4:35 p.m. EDT

ISM manufacturing index falls below 50, signals contraction

‘Notable decrease’ in business confidence seen, ISM says

By Greg Robb, MarketWatch


Bloomberg Enlarge Image
A worker welds metal components at an assembly plant in New Holland, Pennsylvania.

The numbers: The Institute for Supply Management’s manufacturing index fell to 49.1% in August from 51.2% in July.

Any reading below 50% indicates a contraction in activity. This is the lowest reading since January 2016. Economists surveyed by the Wall Street Journal forecast the ISM factory index to slip to 51.0 in August.

Enlarge Image
The manufacturing sector since 2011

What happened: The new orders index sank 3.6 points to 47.2% and the production index fell 1.3 points to 49.5%. Only nine of the 18 manufacturing industries reported growth in August and only three reported gains in new orders.

Comments from supply managers reflected “a notable decrease in business confidence” in August, the ISM said.

Separately, IHS Markit reported that its manufacturing purchasing managers index improved moderately in the final reading in August. The index rose to 50.3% in August from the 49.9% flash reading. It was still below 50.4% in July and is the lowest reading since September 2009.

The big picture: The manufacturing sector has been hammered by U.S.-China trade tensions. The index has fallen nearly 10 points since the trade war began last summer.

But Richard Moody, chief economist at Regions Financial Corp, noted that a sizable inventory overhand, gradually easing motor vehicle sales and Boeing’s (NYS:BA)   troubles with its 737 MAX have contributed to the sectors woes.

The larger question is whether the contraction in manufacturing will lead to a steep downturn in the broader economy. That could happen if businesses stop hiring and begin to shed workers.

What are they saying? “Grim. No sign of hitting bottom despite better regional surveys,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Market reaction: U.S. stocks were already headed firmly lower on Tuesday after the increase of tariffs on $112 billion of Chinese goods and moved lower after the weak ISM data. The S&P 500 index (S&P:SPX)  dropped 20 points while the Dow Jones Industrial Average closed down 285 points or 1%. . The yield on the 10-year Treasury note (XTUP:BX:TMUBMUSD10Y)   tumbled 6 basis points to trade at 1.441% after the ISM report.

Read: All-time low stands as last hurdle for 10-year Treasury yield plunge

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