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Economy in Brief

US Purchasing Managers "Recession" Warning---- Few Firms Report Gains in Orders and Production
by Joseph G. Carson ([email protected])  September 3, 2019

The August report from the Institute of Supply Management on the manufacturing sector showed a sharp drop in overall activity, with very few firms reporting gains in new orders and production. The manufacturer's purchasing managers' index has one of the best records of foreshadowing recession so the drop in the composite index in August, although its only for a single month, highlights how vulnerable the overall economy is at the present time.

In August, the composite index dropped 2.1 percentage points to 49.1, falling below the all-important threshold of 50 (the so-called dividing line between growth and contraction) for the first time since 2016.

Four of the five components that comprise the overall index dropped in August, led by declines in employment, production and new orders. The only component that rose in the month was inventories. That's a bad mix, as it signals more weakness in manufacturing in coming months.

The new orders index at 47.2, dropping below 50 and also below the composite index of 49.1 is a troubling development as the orders index usually offers insight in the future direction of the overall index.

In August, only three industries out of 18 manufacturing industries reported gains in new orders, and only 4 out of 18 reported gains in production. Combined, these numbers on firms reporting gains in orders and production match the lowest of the current cycle and also are marginally below the levels that were in place in the fall of 2009.

To be fair, the signal from the purchasing managers survey has to be sustained over a span of several months for it to confirm a sharp slowdown or an outright decline in economic activity. Yet, the clock is ticking and the outcome of the US/China trade talks could easily tip scale one way or the other, but in the meantime the key takeaway from the August purchasing managers survey is that a number of companies earnings report will be weaker than expected for Q3.

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