In August, the manufacturing industry in U.S braked to a low that has never been experienced in more than two years. However, some gains in the construction spending and automobile sales indicated that the economy was still intact.
Reduction in deep spending and a strong dollar are reasons behind the sudden plunge in manufacturing sector. According to the economists, the slowdown was likely an early indicator of fallout from the recent stock markets turmoil. The economists believe that it could bolster the case against the raising of interest rates by Federal Reserve later this month.
The deputy chief economist at New York’s TD Securities, Millan Mulraine said that the sharp slowdown suggest that the U.S business decisions have begun responding to the effect of the recent rise in uncertainty towards global and Chinese growth. “We expect Fed will take a pass on increasing rates as they continue evaluating the incoming data for any fallout evidence.”
Stanley Fischer, Fed Vice Chairman last week told CNBC that it was too early to make a decision on whether financial market rout had made this month’s rate hike to be less compelling. September 16-17 will witness the convergence of the Committee responsible for U.S central bank’s policy setting.
The Falling Manufacturing Industry
The Institute for Supply Management (ISM)’s national activity index fell from 52.7 in July to 51.1 in August, the lowest reading since May 2013. A reading that exceeds 50 suggests growth in the manufacturing sector.
The new orders sub- index of ISM also fell to the lowest point since May 2013, that is 4.8% points to 51.7. The employment index fell from 52.7 in July to 51.2 last month, indicating a moderation in August factory payrolls.
In the month of August, there were reports of growth in 10 out of 18 manufacturing industries, including furniture and machinery. Six industries, including primary metals, apparel and computer & electronic products experienced a contraction in their activities.
Markit financial firm also corroborated the weakness. The firm reported that its U.S Manufacturing Purchasing Managers’ Index fell from 53.8 in July to 53.0 in August, a near two-year low.
Dollar Drag
12% of the U.S economy consists of manufacturing. Since June 2014, the dollar has gained 16.8% against the currencies of main countries that trade with the U.S Therefore, a strong dollar has put much pressure on this sector.
Since June 2014, the crude oil prices dropped more than 60%, leading to deep expenditure reductions in the energy sector. In spite of these hurdles, the performance of the U.S factories is not as bad as their global peers’ performances. Last month saw China’s giant manufacturing industry contracting at its fastest speed in three years and the factory growth in the euro zone eased.
While the manufacturing data showed that the U.S dollar plunged against a number of currencies, prices for the government debt increased. Wall Street Stocks dropped sharply.
Strong domestic demands may help save the day
Strong domestic demand will likely blunt the slowdown in manufacturing and its effect on the economy. Tuesday reports suggested that U.S auto sales rose in August, making the industry to be on track for its best annual sales in the U.S since 2001.
According to a Thomson Reuters poll of 47 economists, early data showed sales of nearly 17.5 million vehicles on a yearly basis, effortlessly outshining the forecast of 17.3 million vehicles.
Even though the manufacturing industry is slowing down, the U.S economy remains unbeatable. As families continue purchasing homes, demand for manufacturing construction items should take an upturn.
