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Recap: District Bank surveys of manufacturing point to current softness in the factory sector and little anticipation of improvement in the near future

The five District Bank surveys of manufacturing conditions for August are all reported. It is a mixed picture for the factory sector across the regions that on net is slightly positive. However, that does not disguise that activity has fallen sharply from a year ago and that expansion is modest, at best.

The headline indexes from the New York, Philadelphia, and Dallas surveys are a measure of perceptions of conditions. Two of the three surveys – New York and Dallas – pointed to an increase in activity in August from July.

The New York general business conditions index was little changed at 4.8 in August after 4.3 in July. Activity has managed to expand modestly even in as conditions remain uncertain. The Dallas Fed’s general business activity index managed to regain some expansion after three months of negatives, but its level was only narrowly positive at 2.7. The Philadelphia index slipped 5.0 points to 16.8. It had a somewhat firmer tone than the other Districts, but it also has been erratic of late and its underlying trend is likely only one of middling activity.

The Richmond and Kansas City Fed indexes are calculated from components. Richmond’s Composite Manufacturing Index staged a 13 point rebound, but only to a meager reading of 1 in August after plunging to -12 in July from 2 in June. In recent months, expansion is holding on by a thread. For the Kansas City Manufacturing Index, contraction seems to be deepening with a reading of -6 after -1 in July and has been on a downward trajectory since April.

All told, it looks like activity in manufacturing has settled to where it is expanding sluggishly and without sustained upward momentum, an unwelcome contrast to the heights of 2018.

There was also little hint that the present lackluster situation is anticipated to improve in a meaningful way. The survey indexes for six month expectations showed that future activity is viewed mainly to the downside, or at best about flat.

The ISM Manufacturing Index for August at 10:00 ET on Tuesday, September 3 is unlikely improve on the 51.2 reading for July. One hopeful sign is that most of the regions experienced a rise in new orders and faster shipments. However, that has to be balanced against flagging employment, contractions in inventories, and narrowing delivery times. I would anticipate the reading to remain in the low 50’s as it has for the past four months.

It is hard to avoid the conclusion that an upswing in confidence – business and consumer – that followed the Presidential election in 2016 and which coincided with synchronized global expansion resulted in a period of robust growth for the manufacturing sector. It is equally hard to not conclude that whatever goodwill greeted the election of Donald Trump and which remains elevated is not enough to offset the detrimental effects of antagonistic trade policies and their accompanying uncertainties. The effects were not that damaging early in 2018 when the sugar high from the December 2017 tax laws changes was most evident. However, these have faded along with global trade.

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