Manufacturing in U.S. Contracts for First Time in Six Months

Manufacturing in the U.S. unexpectedly contracted in August for the first time in six months amid slumping orders and production that raise concern of renewed industrial weakness.

The Institute for Supply Management’s index dropped to 49.4, weaker than the most pessimistic estimate in a Bloomberg survey, from 52.6 in July, figures from the Tempe, Arizona-based group showed Thursday. The decline of 3.2 points was the biggest since January 2014.

Fresh orders to American factories shrank for the first time this year, as production was cut by the most since 2012 and employment fell, the report showed. The figures are surprising considering other data point to an economy that is bouncing back on the heels of still-robust consumer spending and progress in paring inventories.

“It suggests the challenging environment for manufacturers is continuing,” Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said before the report. “It’s not as if the clouds over the outlook have lifted to give us more clarity on the U.S. and global demand.”

Eleven of 18 industries surveyed by the purchasing managers’ group posted a contraction, including electrical equipment, appliances and components; and apparel, leather and allied products. Among the six that reported growth were industries such as computer and electronic products; food, beverage and tobacco products; and chemicals.

The setback in manufacturing in August probably signals companies remain hesitant to invest in equipment, with corporate leaders awaiting the outcome of the U.S. presidential election and assessing the global economy’s prospects.

An ISM index level below 50 shows contraction. The median forecast in a Bloomberg survey of economists called for a reading of 52, with estimates ranging from 50.7 to 53.4.

Orders Slump

The group’s gauge of orders dropped to 49.1 in August from 56.9 a month earlier, the steepest slide since January 2014. Order backlogs deteriorated for a second month, reaching the weakest level since January and signaling output will continue to languish.

Less demand means producers have little reason to hire. The ISM’s gauge of factory employment fell to a five-month low of 48.3 from July’s 49.4. The measure has shown contraction in all but one month this year.

The purchasing managers’ group’s report also showed measures of inventories at factories and at their customers were each close to 50, indicating stockpiles are about where they should be.

Combined with another month of growth in exports, whose gauge held at 52.5, and imports falling to 47 from 52, the report suggests the weakness in manufacturing may be related more to domestic demand.