US Manufacturing Output Declines in August, Dampening Business Confidence
In August, US manufacturers faced another challenging month, with a decline in output and a growing sense of pessimism about the near-term outlook. This setback comes after a brief period of respite in July, indicating that the manufacturing sector is struggling to gain momentum. The drop in output is accompanied by a steep deterioration in order books, suggesting that firms will need to continue scaling back their production volumes in the coming months.
The survey conducted by S&P Global’s US PMI reveals that the deflationary impact of improved supply chains, which had been driving down prices, has peaked. In August, prices started to rise at an increased rate again, signaling a shift in the trend. However, falling demand continues to dampen pricing power, resulting in overall subdued inflationary pressures in the manufacturing sector.
Policy initiatives such as the CHIPS and Science Act and the IRA are expected to provide some support to production in the medium term as US manufacturing capacity expands. Additionally, a shift in the inventory cycle towards restocking is anticipated by the end of the year, as indicated by improvements in metrics such as the orders-inventory ratio. These factors offer glimpses of hope for a manufacturing revival. However, businesses remain cautious due to declining business confidence, hinting at potential headwinds in the near term.
The decline in US manufacturing output in August reflects a broader weakening trend that has been ongoing for over a year. The Federal Reserve’s production index shows a 0.7% decrease compared to the previous year and remains 2.3% below the pre-pandemic peak in 2018.
The fall in output can be attributed to further losses in order books. New order volumes have been declining for the majority of the past 15 months, with August experiencing one of the sharpest drops since the global financial crisis. Importantly, the rate of decline in orders continues to outpace the rate of production, indicating further downward pressure on output unless demand experiences a revival.
Producers, however, do not anticipate a demand revival in the near future. Expectations of output in the year ahead sharply declined in August, leading to a depletion of backlogs of work. This decrease in capacity utilization has resulted in a minimal rise in employment, the smallest recorded since January.
Amidst these challenges, there are some positive indicators. The survey’s orders-inventory ratio, which reflects new orders compared to purchased inventory, has reached its highest level since December 2021. This improvement suggests some support for production. Furthermore, while the ratio of new orders to finished goods inventory dipped slightly, it remains high compared to the past year’s standards.
One positive outcome of the manufacturing downturn is the relief on supply chains. The survey indicates faster lead times in August, implying reduced pressure on prices and costs. However, average input prices for raw materials rose for the second consecutive month, primarily due to increased fuel costs and upward wage pressures. While the rate of input cost increase remains weaker than earlier this year, it suggests that the peak deflationary impact caused by the post-pandemic easing of supply constraints has passed.
In summary, US manufacturing output declined in August, accompanied by a dimming of business confidence. The sector continues to grapple with falling demand, which outpaces production cuts. While policy initiatives and the prospect of restocking offer some hope for a revival, businesses remain cautious due to prevailing uncertainties. The rise in input costs indicates a shift away from deflationary pressures, but overall inflationary pressures in the manufacturing sector remain subdued.
