August Manufacturing Slows, Raises Questions on Job Creation and Inflation
Additional reports coming this week will create a fuller picture of the economy, inflation and the Fed's plan.
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*Manufacturing activity continued to soften in August, and the odds of a September rebound are low
*August manufacturing PMIs raise questions over job creation and inflation expectations
*Service sector PMI reports on Friday will provide a fuller picture of the economy, inflation what could come in Friday’s Employment Report
In Tuesday's video, we discussed the busy week of economic data ahead and how it will not only influence what the Fed does on September 18 but shape its upcoming set of refreshed economic expectations that will accompany that upcoming policy decision. Tuesday morning brought the August Manufacturing PMI reports, the first set of the week’s data, and they showed that part of the economy remained weak during the month. Seeing that new orders and net export orders contracted further in August due in part to continued softening in the eurozone, we do not see the manufacturing sector rebounding in September.
Looking at the ISM data in particular, this means the manufacturing part of the domestic economy will have contracted in 12 out of the 13 months culminating with September 2024. Juxtaposing this a bit means the growth we’ve seen in the overall economy over the last year has been fueled by the services sector. This means the August Service PMI and the August Non-Manufacturing PMI reports due on Thursday will be far more telling when it comes to the economy and what the Fed is likely to say in two weeks.
While we wait for that report, we can glean some other insights from today’s back-to-back August manufacturing PMI reports:
August Job Creation
S&P Global’s report found the following:
“… manufacturers saw a renewed decline in employment midway through the third quarter. Staffing levels decreased for the first time in 2024 so far, reflecting falling new orders and lower output requirements.”
Turning to ISM, its employment index for the manufacturing sector contracted for the third consecutive month in August. “Respondents’ companies are continuing to reduce head counts through layoffs, attrition and hiring freezes.”
These nuggets suggest the market’s expectation for a rebound in August job creation in Friday’s monthly Employment Report to 160,000 jobs, up from 114,000 in July, has some room for disappointment. While a job print between those two figures would mesh with a no-to-slow soft landing for the economy, a print below 114,000 would be a fourth month of falling job numbers. Such a print would reinforce the market’s view for multiple rate cuts this year.
To these figures, we’ll add what we learn from this week’s August jobs reports from ADP, Challenger and the August Service PMI ones.
Inflation
Recent data has shown continued progress toward the Fed’s 2% target, but ISM’s August Manufacturing report showed an upturn in the Prices index to 54.0 from 52.9 and 52.1 in the prior two months. Those findings are echoed by S&P Global’s findings:
“The rate of input cost inflation quickened to a 16-month high in August and was above the average seen before the COVID-19 pandemic. Higher costs for shipping and labor were reported, alongside rising raw material prices. In turn, output prices also increased at a faster pace…”
Our take on this is that these figures are not constructive for rate cuts, and it could be helping fuel today’s market sell-off. As we see it, the part of the economy that we need to watch for inflation has been the one for the services sector. This gives us another reason to pay close attention to Thursday’s sets of reports.
