August ISM Manufacturing Index: 51.1 Percent vs. 52.5 Expectations, Down From 52.7 in July (Update: Construction Spending Comes in Strong)

From the Institute for Supply Management (bolds are mine; some paragraph breaks added by me):

Economic activity in the manufacturing sector expanded in August for the 32nd consecutive month, and the overall economy grew for the 75th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.

… The August PMI® registered 51.1 percent, a decrease of 1.6 percentage points from the July reading of 52.7 percent.

The New Orders Index registered 51.7 percent, a decrease of 4.8 percentage points from the reading of 56.5 percent in July. The Production Index registered 53.6 percent, 2.4 percentage points below the July reading of 56 percent.

The Employment Index registered 51.2 percent, 1.5 percentage points below the July reading of 52.7 percent. Inventories of raw materials registered 48.5 percent, a decrease of 1 percentage point from the July reading of 49.5 percent. The Prices Index registered 39 percent, down 5 percentage points from the July reading of 44 percent, indicating lower raw materials prices for the 10th consecutive month. The New Export Orders Index registered 46.5 percent, down 1.5 percentage points from the July reading of 48 percent.

Comments from the panel reflect a mix of modest to strong growth depending upon the specific industry, the positive impact of lower raw materials prices, but also a continuing concern over export growth.

Of the 18 manufacturing industries, 10 are reporting growth in August …

Six of the remaining eight industries were in contraction.

Expectations as seen at Yahoo’s Business Calendar averaged 52.5 percent.

51.1 percent, while still expansion (any reading above 50 percent represents expansion), is certainly not strongly so.

Of the three primary GDP drivers, the New Orders and Production declines are certainly significant, and Backlog of Order remained in contraction, while less seriously so (46.5 percent in August vs. 42.5 percent in July).

The problem for some time has been that this index has portrayed a rosier picture than we have seen in the related government data, which has mostly been in a year-over-year hard-data decline during 2015 thus far. So today’s news doesn’t bode well for third quarter GDP, which by many estimates is due to come in at an annualized 2.0 percent or below — perhaps far below.

I believe that ISM, although not intentionally so, is cherry-picking manufacturing facilities which are doing well and not adequately considering those which either aren’t doing well or have closed. I would suggest that since ISM’s index isn’t positive by all that much, the manufacturing sector as a whole is likely in at least a mild contraction.

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UPDATE: Better news came from the Census Bureau’s July Construction Spending report:

&The U.S. Census Bureau of the Department of Commerce announced today that construction spending during July 2015 was estimated at a seasonally adjusted annual rate of $1,083.4 billion, 0.7 percent (±1.5%)* above the revised June estimate of $1,075.9 billion. The July figure is 13.7 percent (±2.0%) above the July 2014 estimate of $952.5 billion.

During the first 7 months of this year, construction spending amounted to $583.2 billion, 9.3 percent (±1.5%) above the $533.7 billion for the same period in 2014.

June’s increase was revised up from +0.1 percent to 0.7 percent.