The cracks have been showing for some time, but the outright contraction in the manufacturing sector in August was still a surprise, coming in weaker than economists’ forecasts.
The ISM Manufacturing Index declined to 49.1 in August, falling well short of expectations for a moderate increase while also hitting a 7-year low. New orders fell sharply, with that specific Index dipping to 47.2. That was consistent with an outright contraction in orders, which had been growing moderately until last month.
As a key leading indicator, the index is an important gauge of the health of the cyclically sensitive manufacturing sector. Although it had been trending lower in recent months, indicating that the pace of growth was slowing, its slippage into contractionary territory reflects the rising risk to not only the manufacturing sector, but the broad economy as well.
Tariffs and the escalating trade war with China remain a critical concern to manufacturers, as the negative impact on customer demand and business confidence are readily apparent. What isn’t fully reflected so far are the additional tariffs that have been announced but not yet enacted, which – if implemented as planned – will weigh further on the sector. The disruptive impact is perhaps most obvious in the sharp slowdown in new export orders and imports. Both have been falling, but the pace of decline accelerated in August.
The outlook for manufacturing largely hinges on the trade war narrative. Risks have certainly increased as global growth has slowed, but the damage to business sentiment is growing as well. Given the ratcheting up of tensions in recent weeks, risks to the manufacturing sector have risen further. At this point, it appears that conditions will likely worsen in the coming months.
A favorable resolution on trade would go a long way toward alleviating growing anxiety for businesses; in the near term, that appears increasingly unlikely. For now, the outlook for manufacturing remains cloudy. The longer the trade war drags out, the greater the risk to the expansion.
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