For the first time in nearly three years, the PMI (manufacturing index) registered in negative territory, declining to 49.1 for August 2019. This represents a decline of 2.1 points (or percentage points as ISM reports) from the July report. For those not familiar with the ISM indexes, manufacturing (PMI) and non-manufacturing, a number above 50 indicates economic growth within the sector, whereas a number under 50 indicates contraction.
This reported number may (or may not) be cause for concern. But it is important to put this information in context. In this regard, ISM indexes are a composite index of underlying components. These individual elements are also measured on the same scale. According to ISM spokesman and chair of the Manufacturing Business Survey Committee for ISM, Timothy Fiore, “the New Orders Index registered 47.2%, a decrease of 3.6 percentage points from the July reading of 50.8%. The Production Index registered 49.5%, a 1.3-percentage point decrease compared to the July reading of 50.8%.”
Further, “the Supplier Deliveries Index registered 51.4%, a 1.9-percentage point decrease from the July reading of 53.3%. The Inventories Index registered 49.9%, an increase of 0.4 percentage point from the July reading of 49.5%. The Prices Index registered 46%, a 0.9-percentage point increase from the July reading of 45.1%.”
Analyzing the information as well as the qualitative insights from the August report, Fiore notes that “comments from the panel reflect a notable decrease in business confidence … with steady expansion softening over the last four months.”
Past ISM declines have shown the ability for the index to “bounce” off lows. For example, in 2016 the PMI hit a low of 48 (lower than the August numbers), then showing a relative ascent in the months to come, hitting positive territory shortly thereafter. And shortly after 2009 PMI numbers crashed to under 40, numbers rebounded to positive territory in a matter of quarters.
ISM PMI reports also feature qualitative commentary from participants. As a Chemical Products company reported, “while business is strong, there is an undercurrent of fear and alarm regarding the trade wars and a potential recession.” A Plastics and Rubber products firm notes, “Current business is OK, nothing to brag about. Under projections and slightly below last year, (but) margins are hanging in there.” And as a diversified manufacturer in the report notes, “Generally, business remains steady. However, we continue to plan for a hard Brexit and a long trade war between the U.S. and China.”
In recent weeks, Reuters reports that U.S. GDP growth for Q2 2019 was revised downward (as economists expected) to 2% from 2.1%. Noting that “the economic expansion, now in its 11th year, is under threat from the Trump administration’s yearlong trade war with China, which has undercut business investment and manufacturing,” Reuters appears to be signaling cause for concern, at least relatively. But Fox Business reported that Federal Reserve Chairman Jerome Powell “does not foresee the U.S. sliding into a recession soon, despite a slowdown in global growth and uncertainties surrounding the U.S.-China trade war.”
In analyzing the PMI, Bloomberg takes the line that “the data add to concern a broader U.S. recession is coming,” suggesting that, “Trump’s escalating tariffs on imports from China have been a major reason behind factory weakness that threatens to spread to consumer spending.”
Our take is more nuanced. First, we believe that manufacturers should aggressively take advantage of declining prices in key commodities, negotiating agreements with suppliers. Second, we see the trade battle with China as more than “noise” but not a singular factor that will lead us into a recession in the near-term, in part because of low unemployment and (relatively) healthy consumer spending. Still as they look to manage costs and uncertainty, manufacturers should not be afraid to toss in economic arguments and emotion into both local and global supplier negotiations while taking a slightly more conservative growth line on demand and inventory planning.