August Supply Manager Reports

The Institute for Supply Management’s (ISM) two indicators continued to illustrate the economy’s bifurcation in August.  The reading on the manufacturing side of the economy has contracted for three consecutive months (50 is the dividing line between growth and contraction), and the service or non-manufacturing index improved to its best reading since May.  Manufacturing stagnated to 49.6 from 49.8 in July and non-manufacturing improved to 53.7 from 52.6 during the same period.  The ISM is a perfect example of why it is tough to solve the directional conundrum of the economy.  One sector looks as if it is picking up steam while the other points to slowing output.

New orders get most of the attention in this indicator since orders will need to be turned into actual output in the near future.  Manufacturing new orders read 47 (also the third month in a row below 50), but non-manufacturing new orders remained solidly above 50 with a reading of 53.7 just 0.6 less than July’s count.  As mentioned above, manufacturing new orders have been declining since June, and this slowdown has made its way into actual output as production took a sharp fall of 4.1 points to 47.2 giving manufacturing output its first sub-50 reading since May 2009 a month before the Great Recession ended.

The manufacturing sector is more sensitive to the business cycle, and its recent malaise may be foretelling a turn in the direction of the economy.  On the other hand, the non-manufacturing segment is a much larger part of the economy, so perhaps its strength will overwhelm the recent softness seen from goods producers.  While these contradictory readings do not provide a clear sense of its direction, the economy is not appropriately buttressed for exogenous shocks like fiscal cliffs and uncertainty stemming from non-tested monetary policy from central banks around the world when America’s cyclically sensitive manufacturing segment is showing signs of strain.    (by C. Cox)