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First Cut: 35 months of expansion in ISM Manufacturing Index ended in August

The August ISM Manufacturing Index fell below neutral, bringing to an end 35 straight months of expansion. The index was 49.1 in August after 51.2 in July and the lowest since 49.4 in August 2016. Although the reading is not yet touching on recessionary conditions — usually pegged at about 45.0 — it reflects widespread slowing in orders and production, and a growing watchfulness about the economy going forward. While activity could improve in September, the August data is a warning that the fundamentals for manufacturing have deteriorated.

The component indexes were all softer August and most were consistent with contraction.

New orders fell to 47.2 from 50.8, the first below 50 reading since 49.1 in August 2016. Order backlogs — which are not an index component — firmed slightly to 46.3 in August after 43.1 in July, but continued to contract for a fourth month in a row. Export orders — also not a component — were down to 43.3 in August, contracting for a second month in a row and the softest since 39.0 in March 2009. Imports were also softer at 46.0 after 47.0 in the prior month, the lowest since 46.0 in December 2015. If orders do not revive soon, the outlook could turn even slower.

Production was down to 49.5 from 50.8 in the prior month, and its lowest since 49.5 in November 2015. There is simply too few orders to keep activity rising.

The index for employment fell to 47.4 in August after 51.7 in July and was the below 50 reading since 49.7 in September 2016.

Delivery times continued to hover around neutral — neither too fast or too slow — at 51.4 in August after 53.3 in July. Inventories remained little changed at 49.9 after 49.5 and have remained below 50 for a third straight month.

The price index was also not much changed for the past three months at 46.0 in August from 45.1 in July and 47.9 in June. Energy prices have been the main source of fluctuation, but also prices are broadly lacking in upward pressures as economic activity slows.

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