U.S. Manufacturing Slows

Slowest Expansion in Over Two Years

U.S. Manufacturing Slows
September 17, 2015

The economic slowdown in China is starting to have some effect in the U.S. beyond sending the stock market into periodic convulsions. That's one possible conclusion from the August 2015 manufacturing report of the Institute for Supply Management (ISM).

The ISM PMI, an important leading indicator of economic activity, is a composite index that combines five manufacturing indices: New Orders, Production, Employment, Supplier Deliveries, and Inventories. The PMI fell to 51.1 in August, its lowest reading since May 2013, down from a 52.7 reading in July. (PMI readings above 50 indicate expansion while those below 50 indicate contraction.) The unexpected economic slowdown and lower consumption from China takes most of the blame — China's imports in August fell 14.3%.

New manufacturing orders also fell to their lowest value since May 2013, suffering a drop from 56.5 in July to 51.7 in August. The employment index followed suit, dropping from 52.7 in July to 51.2 in August. Supplier deliveries are slowing, raw material inventories are contracting, and the customer inventories index took a big jump from 44 to 53. All are indicators of slower growth in the manufacturing sector, which constitutes approximately 12% of the economy.

While the slowdown in China's economy is the main concern, the strength of the dollar also plays a role. China's currency devaluation aggravated the problem, but the strength of the dollar against trading partner currencies had been a drag on American exports even before China's recent issues.

Concerns about exports are being partially offset by domestic improvements in demand. Construction spending was particularly bright, with an increase of 13.9%. That's the best year-over-year gain in over nine years. Automobile sales hit a seasonally adjusted 17.8 million in August for the strongest number in ten years.

As a result, not all industries are suffering and some are optimistic about the near future based on their survey comments to the ISM. From one chemical company: "Modest growth slightly ahead of GDP. Optimistic for the remainder of the year as we have little international exposure." Other comments include "Our business is good due to the increase in commercial construction" and "Raw metals price decreases will impact our business favorably."

It is possible that the ISM report could play into the Federal Reserve's decision whether to raise interest rates at their September meeting. It takes some time for the effect of an event like the Chinese slowdown to work its way through the economy as compared to the immediate effects of the stock market, and the Fed may see a potential economic slowdown that could be aggravated by an interest rate hike — even the small one that is expected.

While the ISM report may not have been good news, it is not catastrophic either. August expansion may have been the slowest in two years, but it was still an expansion. According to ISM, August represented the 32nd consecutive month of expansion in the manufacturing sector and the 75th consecutive month of overall economic expansion. The New Orders and Production Indices have also held above 50 for 33 and 36 consecutive months respectively.

Third quarter GDP estimates are still around 2.5% growth — not up to the 3.7% growth of the second quarter but more in line with recent growth rates. Economists are expecting growth to continue at a relatively slow pace, but they are expecting growth all the same, likely keeping the PMI above 50.

Keep the bad news of the PMI report in perspective — many countries would happily trade their economic performance for ours right now.


Photo ©iStock.com/ewg3D

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Steffanie | 09.17.15 @ 16:02
The rise and fall of these indicators seems to be the normal ebb an flow of economics.
Elaine | 09.17.15 @ 16:03
Good to hear not all industry are suffering.
Angie | 09.17.15 @ 16:04
This still sounds very optimistic - I would hope that this report would not cause any panic in the stock market.
Britt | 09.17.15 @ 16:04
I kinda already knew this.... USA made stuff is sadly rapidly on the decline because it's cheaper to make it elsewhere.
Jackie | 09.17.15 @ 16:05
Although the growth was small, it's still growth. Some countries are steadily declining in manufacturing.
trish | 09.17.15 @ 16:06
There will always big highs, and lows in our economy. 'Hoping we get back to making more in America instead of going elsewhere to make things less expensively
Kathryn | 09.17.15 @ 16:08
I'm happy there is increase at least somewhere, I'm very worried about America's situation right now.
Carla Truett | 09.17.15 @ 16:11
Sadly the shape of our economy is one big roller coaster ride. I am glad to hear that not all industry are suffering.
Daniel Dohlstrom | 09.17.15 @ 16:13
Hope to see this change for the better. The US needs to get back to being a manufacturing center not sending everything overeseas
Clarissa | 09.17.15 @ 16:18
Fluctuations are normal part of our economy. It is good to be smart about your investments if you have any.
Stokes | 09.17.15 @ 16:19
The rise and fall of production and the economy are typical. You have to get through the low point to get back to the high points.
Nancy | 09.17.15 @ 16:20
I love bad news that isn't entirely bad. All cloud has a silver lining and it sounds like this is nothing to panic about.
Kamie | 09.17.15 @ 16:21
I just want us to be back to USA made items.
Jonathan | 09.17.15 @ 16:21
Pretty basic supply and demand economics, what I find funny is China, a communist country, thought they could control it.
Alec | 09.17.15 @ 16:28
I learned in elementary school that the economy fluctuates like this on a normal basis. I'm not well versed in this kind of thing but I feel like the Chinese economic drop is being over exaggerated since I know the vast majority of US products are made in China. (
Ron | 09.17.15 @ 16:28
I always detest the need for growth, growth, growth. Markets, needs, and wants change and whole new industries are eroded and birthed. The fact that unfounded paranoia can sink my 401k does not make me happy.
Sarah | 09.17.15 @ 16:41
It is what it is. While not great, it's still not bad and there's something to be said for that.
Angie Taylor, Insurance Agent in Montevallo, AL | 09.17.15 @ 16:42
Its really not very surprising.
Zanna | 09.17.15 @ 16:44
Slow growth, especially growth over consecutive months (which are actually years), should be considered a good thing. Slow and steady is good.
Chelsey | 09.17.15 @ 17:00
I wish we could bring more manufacturing back to the US. These numbers don't really surprise me.
Rindy | 09.17.15 @ 17:01
I hate that we depend on China so much. There is no reason we cannot make American products here. We have just gotten so greedy.
Selena Walls | 09.17.15 @ 17:03
Good to know not everyone is suffering
Irene | 09.17.15 @ 17:07
I know there are far fewer manufacturing jobs in my area than there used to be,.
Erin | 09.17.15 @ 17:08
If people were willing to pay higher prices we could have better quality items made here in the US.
gracie | 09.17.15 @ 17:09
No surprise here? Industry rises and falls periodically. I would prefer to see more of it come back to the USA in employment and in sales.
Andrea | 09.17.15 @ 17:10
Manufacturing needs to come back to the US. We need to focus the Americans.
Christina | 09.17.15 @ 17:10
Good to know not all industries are having it hard right now.
George Middleton | 09.17.15 @ 17:15
It would be nice if they send the work back over to the U,S.
Crystal | 09.17.15 @ 17:20
Informative article
Heather | 09.17.15 @ 17:32
Seems like a normal roller coaster ride of economic times. Just thankful for small growth when we have it.
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