QQQA - U.S. Manufacturing Reports Steepening Output Loss But Supply Chain Delays And Price Pressures Ease

Summary

• The seasonally adjusted S&P Global US Manufacturing Purchasing Managers' Index (PMI) posted 51.5 in August, down from 52.2 in July to the lowest since July 2020.
• More positively, supply chain delays moderated in August, and price pressures fell to the lowest for one and a half years.
• The PMI survey's Output Index showed US factory production having dropped for a second month running in August, with the New Orders Index meanwhile indicating that demand for goods has now fallen for 3 straight months.

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers' Index™ (PMI™) posted 51.5 in August, down from 52.2 in July to the lowest since July 2020.

We look beyond the survey's headline index to provide more color on the health of US manufacturing, with is undergoing a period of falling demand, inflation and ongoing supply constraints, which are driving output lower and leading to a greater reluctance to invest in machinery and labor.

More positively, supply chain delays moderated in August, and price pressures fell to the lowest for one and a half years.

Output down for second straight month

The PMI survey's Output Index showed US factory production having dropped for a second month running in August, with the New Orders Index meanwhile indicating that demand for goods has now fallen for three straight months.

Barring the initial pandemic lockdown months, this is the steepest downturn in US manufacturing signalled by the PMI since the global financial crisis in 2009. Forward-looking indicators such as the orders-inventory ratio suggest that the downturn has further to run.

Companies blamed a variety of factors for the deterioration in demand, including the ongoing impact of soaring inflation, supply constraints, rising interest rates and growing uncertainty about the economic outlook.

Reluctance to invest and expand

Worryingly, the sharpest drop in demand was recorded for business equipment and machinery, which points to falling investment spending and heightened risk aversion. At 44.7, the New Orders Index for producers of investment goods such as plant and machinery was the lowest since comparable data were first available in late 2009, excluding the first pandemic lockdown months of early 2020.

Similarly, payroll growth slowed close to stalling, reflecting a growing reticence to expand workforce numbers in the face of the deteriorating demand environment. August's Employment Index was the second lowest for just over two years and, at 51.1, well below the average of 53.0 seen so far during the recovery.

Supply delays moderate

Falling demand for raw materials has, however, taken pressure off supply chains and helped shift some of the pricing power away from sellers towards buyers.

Although vendor performance deteriorated again in August as transportation and logistics issues remained evident, the lengthening of average supplier lead times was the smallest since October 2020.

With supply constraints having acted as a major cause of higher prices during the pandemic, this easing of supply delays has led to a commensurate cooling of price pressures. Average input costs paid by producers rose in August at the slowest rate since January 2021, reflecting this partial shift in pricing power away from sellers towards buyers.

Inflationary pressures ease

Although still elevated by historical standards, the survey's inflation gauges measuring both input costs and selling prices are now at their lowest for one and a half years, which should help to bring consumer price inflation down in the coming months.

The manufacturing PMI's Input Cost Index, for example, exhibits an 86% correlation with the annual change of consumer prices in the US, with the PMI acting with a lead of two months.

Clearly, the inflation outlook will also depend on service sector inflation rates and the volatile energy market in particular, but the feeding through of lower supply-related cost pressures in manufacturing undoubtedly bodes well for the inflation outlook in coming months.

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