The ISM Manufacturing Index rose to 48.7 in May, up from 48.0 in July, but remained in contraction territory.
Only seven of 18 industries reported growth for the month, matching July’s share. Roughly 70% of manufacturing GDP contracted in August, down from 79% recorded in July.
However, demand conditions improved in August, with the new orders index rising by 4.2 points to 51.4, signaling expansion for the first time since January. The new export orders index also rose by 1.5 points to 47.6, but continued to signal a contraction. The backlog of orders index fell 2.1 points on the month to 44.7, reversing the prior month’s uptick and also signaling contraction.
The production index fell in August to 47.8 from 51.4, falling back into contraction territory after two months of expansion. The employment index remained in contractionary territory, but at a slower pace, with the index rising to 43.8 vs. 43.4 in July.
Price gains decelerated in August, coming in at 63.7 vs. 64.8 in August. However, the prices index continued to fluctuate near a three-year high.
Key Implications
Manufacturing activity contracted at a slower pace in August as domestic demand expanded and the decline in foreign demand slowed. However, with a host of tariff policies coming into effect during the month, including the full slate of reciprocal tariffs and 50% tariffs on Brazil and India, manufacturing production slipped back into contraction territory and hiring activity remained notably subdued.
Furthermore, sentiment relayed by survey respondents was dire. Comments included in the survey ranged from comparisons to the 2008 financial crisis in the transportation equipment industry, to describing current business plans as survival in the electrical equipment, appliances & components industry. The recent court ruling against many of the administration’s tariff policies only adds to the uncertainty businesses are facing, as the case continues to be reviewed by the courts. While the likely return of interest rate cuts at the Federal Reserve’s next meeting in two weeks will be welcome, trade policy is likely to remain a material headwind for the manufacturing industry through the second half of the year.