ISM and Markit PMI On Verge of Contraction: Expect Contraction Next Month

The closely watched Manufacturing ISM is still above 50 indicating expansion but I suspect for not long.

Why?

Look at new export orders, deliveries that are expanding while the backlog of orders is now deep in contraction.

Manufacturers cannot use backlogs to keep production up with new orders barely above break even.

The details suggest production will go into contraction next month.

Markit PMI Lowest Since September 2009

Markit reports the US Manufacturing PMI Falls to Lowest Since September 2009.

U.S. manufacturing firms signalled only a fractional improvement in business conditions in July, with the headline PMI dropping to its lowest since September 2009. Driving less robust overall growth was a slower increase in production and muted client demand. Although the rate of expansion in new business quickened, it remained historically subdued, with export orders contracting for the second time in the last three months. In line with less robust demand, optimism among manufacturers dipped to a series low. Firms were also more cautious towards hiring, with employment falling for the first time since mid-2013.

Chris Williamson, Markit’s Chief Business Economist Comments

1. “US manufacturing has entered into its sharpest downturn since 2009, suggesting the goods-producing sector is on course to act as a significant drag on the economy in the third quarter. The deterioration in the survey’s output index is indicative of manufacturing production declining at an annualised rate in excess of 3%.
2. “Falling business spending at home and declining exports are the main drivers of the downturn, with firms also cutting back on input buying as the outlook grows gloomier. US manufacturers’ expectations of output in the year ahead has sunk to its lowest since comparable data were first available in 2012, with worries focused on the detrimental impact of escalating trade wars, fears of slower economic growth and rising geopolitical worries.
3. “Employment is now also falling for only the second time in almost ten years as factories pull back on hiring amid the growing uncertainty.
4. “More positively, new order inflows picked up for a second successive month. Although remaining worryingly subdued compared to the strong growth seen earlier in the year, the modest improvement will fuel hope that production growth could tick higher in August.

Comment number 4 seems way too optimistic given the other points and the ISM Report.

Mike “Mish” Shedlock