US manufacturing activity expanded for an eighth consecutive month in August, with growth moderating from the fastest pace in four years. According to data released Tuesday by the Institute for Supply Management, the manufacturing gauge fell to 54.6 from 55.6 in July, marking the second-highest reading since 2022. The August reading came in slightly below the consensus of 55.2, though it remains well above the 50 mark that separates expansion from contraction. Figures above 50 indicate growth, demonstrating continued strength in the manufacturing sector despite some easing from previous levels. The retreat partly reflects a fading boost from businesses front-loading orders to avoid higher prices and shortages linked to the six-month U.S.-Israeli war with Iran. Manufacturing, which accounts for about 9.4% of the economy, continues to benefit from an artificial intelligence buildout, with further support expected from inventory replenishment after five straight quarters of declines.
S&P Global's final manufacturing PMI for August reached 53.9, up from the preliminary estimate of 53.2, providing additional confirmation of the sector's moderating but still positive trajectory. As per S&P Global Market Intelligence economist Usamah Bhatti, "Growth in the US manufacturing economy remained welcome, but the August data point to some cracks in the sector's health." Data covering most of the second quarter and the period to August indicated that manufacturing output and demand showed signs of strain. Manufacturers continued to report difficulties sourcing and receiving raw materials because of supply delays and price rises, with these pressures commonly linked to the war in the Middle East, which has exacerbated existing supply and inflationary pressures from tariffs. However, there were areas of encouragement, with business expectations for output over the year ahead improved from July to a three-month high, partly reflecting hopes for an end to the war and a smoother domestic policy path. Firms also noted that greater stability in conditions were likely to support business expansion and customer retention plans.
The bigger concern for policymakers came from stubborn cost pressures that could keep inflation elevated even as factory growth loses some pace. The ISM's prices paid index stayed at 71.1, while the supplier deliveries index rose to 59.3 from 58.9, indicating slower deliveries. These pressures are keeping the Federal Reserve focused on inflation concerns, with Fed Chairman Kevin Warsh saying last Friday the central bank will "have work to do" if policymakers don't get the confidence they need that inflation is falling to the 2% target. According to CNBC, Barr said broader price pressures could become entrenched and stressed that inflation has remained above the Fed's 2% target for nearly five and a half years. He said the central bank could take more time if data showed inflation moving toward 2%, but if that progress remains insufficient, policymakers should act decisively by raising rates. Barr supported the Fed's July decision to keep the federal funds rate target at 3.5% to 3.75%. The ISM survey's gauge of prices paid for inputs was unchanged at 71.1, suggesting inflation could stay above the U.S. central bank's 2% target for a while, with prices continuing to increase for a range of goods including aluminum, steel, copper products, electrical components, fuel, memory components and semiconductors.
The new orders index fell to 53.7 from 56.7 in July, the weakest reading since March but continued to indicate growth. Unfinished work decreased while export orders edged up, showing mixed demand signals. However, S&P Global data shows a significant improvement in employment trends, with manufacturers raising employment at the strongest rate seen so far this year in response to business expansion plans. The production index remained in very strong growth territory at 58.3, historically consistent with GDP growth of close to 3%. Factory employment moderated to 51.2 from 52.8, though this gauge has been a poor predictor of government employment data. A Reuters survey expects factory payrolls to remain weak in August, though overall nonfarm payrolls are seen rebounding after a surprise July decline. The manufacturing employment index fell to 51.2 points after recovering to 52.8 in July, with economists expecting manufacturing payrolls to have remained low in August. Other data confirmed the labor market remained stable, with job openings rising by 89,000 to 7.271 million by the last day of July, up from 7.182 million in June, according to the Labor Department's Bureau of Labor Statistics. The response rate to the JOLTS survey has dropped to just above 30% from around 58% before the COVID-19 pandemic, with some economists questioning whether the survey could be overcounting job openings.
Markets are closely watching the September 15-16 policy meeting, with CME Group's FedWatch tool showing about a 66% probability of a rate increase on Tuesday morning, up from the previous 70% probability. Fed Chairman Kevin Warsh also struck a firm tone last week, with his recent comments widely seen as opening the door to a rate hike as soon as the Fed's next meeting. The benchmark 10-year US Treasury yield climbed to its highest level since mid-January 2025 amid renewed worries around the Middle East, reflecting growing concern about potential rate increases. The continued availability of jobs relative to unemployed people, extremely low layoff rates, growing shortages and price increases in manufacturing, and continued expansion in manufacturing activity take the Fed another small step toward a rate hike on September 16, according to John Ryding, chief economic advisor at Brean Capital. The central bank will receive fresh consumer and producer price data next week before its September meeting, which will be crucial for determining the Fed's next move. According to Federal Reserve Chair Kevin Warsh, the U.S. central bank must be confident that inflation is declining sustainably before making further decisions on monetary policy.
