Monday, 16 September, 2019

U.S. manufacturing sector contracts in August

US manufacturing sector contracts for first time in 3 years Survey: US manufacturing activity contracted in August
Russell Knight | 04 September, 2019, 08:24

Output at US manufacturers shrank for the first time in three years in August, a possible sign that trade uncertainty is having an impact on a key part of the American economy.

The ISM's index of overall factory activity fell to 49.1 in August from 51.2 a month earlier.

The report's key metric, the PMI, fell 2.1% to 49.1 (a reading of 50 or higher indicates growth), following a 0.5% decrease in July and 0.4%, 0.7%, and 2.7% declines in June, May, and April, respectively.

In economic data, the Institute for Supply Management's manufacturing index for August will come out at 10 a.m.

Treasury yields fell on Tuesday as traders pushed the price of European and US government paper higher, amid concerns around U.K. Prime Minister Boris Johnson's plan to drive Britain out of the European Union without a negotiated trade agreement in hand. "The PMI contracted for the first time since August 2016 (when it registered 49.6%) and ended a 35-month expansion period in which the composite index averaged 56.5%". The two-year yield US2YT=RR was 4.2 basis points lower at 1.4640%. The year-long U.S. -China trade war is eroding business sentiment, with business investment contracting in the second quarter for the first time in more than three years. On top of customer inventories being too low, the ISM showed that prices were decreasing while both exports and imports were contracting.

Contractions in USA manufacturing have not always preceded recessions in the wider economy but the latest ISM figures will no doubt raise fears of a downturn. This raises the risk that factory payrolls contracted in August.

But so far manufacturers aren't cutting back as much as they did then.

Employment and production also declined.

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Comments in the report submitted by ISM member respondents were consistent, with commentary on slowing business conditions and ongoing trade tension between the United States and China. The latest escalation follows three months of stalled negotiations after China reportedly walked away from an agreement in May. Transportation equipment, primary metals and electrical equipment, appliances and components were among the seven industries reporting a contraction.

That, in turn, lowered output all along the manufacturing supply chain, from steelmakers to heavy equipment companies such as Caterpillar.

The ISM report was "yet another piece of data showing a weaker manufacturing sector".

"Incoming sales seem to be slowing down, and this is usually our busiest season", said another respondent who makes furniture and other products, highlighting concerns "about the economy and tariffs".

"The story up until now has been global manufacturing recession, with the US standing out as the strongest among the weakening players", said Chris Low, chief economist at FTN Financial in NY.

Economists polled by Reuters had forecast construction spending would rise 0.3% in July.

This report adds to the recession warning of the inverted yield curve which has on several occasions recently seen the 10-year Treasury rate fall below that of the 2-year.

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