U.S. economic slowdown looms due to inadequate manufacturing measures

• In August, 47.2% of purchasing managers reported expansion, which was above the July reading but below the consensus forecast, according to the ISM monthly survey.
• The probability of the Fed cutting interest rates by at least a quarter percentage point later this month increases with another weak economic reading.

In August, U.S. factories continued to operate at a slow pace, causing concern about the future of the economy, as indicated by separate manufacturing indexes.

The Institute for Supply Management's monthly survey of purchasing managers revealed that only 47.2% of respondents reported expansion during the month, which is below the 50% breakeven point for activity.

Despite being slightly higher than the July record, it fell short of the Dow Jones consensus forecast of 47.9%.

Despite being in contraction territory, U.S. manufacturing activity contracted at a slower pace compared to the previous month. According to Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, demand remains weak, output has decreased, and inputs have remained accommodative.

He stated that demand remains subdued because companies are reluctant to invest in capital and inventory due to the current federal monetary policy and election uncertainty.

Despite the index level indicating contraction in the manufacturing sector, Fiore stated that any reading above 42.5% typically signals expansion across the broader economy.

The weaker-than-expected reading last month caused markets to enter a tailspin, resulting in an 8.5% loss for the S&P 500 before recovering most of the losses. Following the latest ISM release on Tuesday, stocks added to their losses, with the index off nearly 500 points.

The probability of the Federal Reserve cutting interest rates by at least a quarter percentage point later this month has increased due to another weak economic reading.

The employment index increased to 46% and inventories rose to 50.3%, but the prices index only slightly increased to 54%, which may cause the Fed to pause when determining the extent of the fully priced in rate cut.

Another PMI reading from S&P showed a decrease to 47.9 in August from 49.6 in July, which supported the ISM results.

The S&P employment index decreased for the first time this year, while the input cost measure reached a 16-month high, indicating that inflation is still present, although it has decreased from its mid-2022 highs.

The manufacturing sector is expected to become an even greater hindrance to the economy in the third quarter, according to Chris Williamson, the chief business economist at S&P Global Market Intelligence.