U.S. manufacturing shrinks in August; solid foreign demand, business investment needed to restore growth

U.S. manufacturing surprisingly shrank in August for the first time since February. Declining orders increase concern of renewed industrial weakness. The Institute for Supply Management manufacturing index fell in August to 49.4 from 52.6 in July. Consensus projection was for a drop to 52.

The weakness was widespread, with decline in all five sub-indices. The key new orders index dropped sharply to 49.1 in August from a solid 56.9 in July. The production index also dropped below the 50 break-even level to 49.6. The inventory and employment indices both continued to stay below 50 at 49 and 48.3 respectively. Moreover, the supplier deliveries index dropped to 50.9.

The contraction of U.S. manufacturing is quite unexpected considering other recent evidence that the drag from inventories and exports is waning gradually. It continues to be seen how the service-producing part of the economy performed in August.

“But for now, we remain cautiously optimistic regarding the outlook for the overall economy, not least because of the continued strong performance of consumer spending”, said Nordea Bank in a research report.

Consumer resilience has been mainly driving the U.S. economic growth in the past year, as shown by the solid personal income and consumption report of July released recently. A robust U.S. consumer would help; however, additional improvement in other factors, mostly stronger foreign demand and a rebound in business investment, would be required to restore sustainable growth to the U.S. manufacturing sector, said TD Economics in a research note.