US: Outright contraction in the factory sector - RBS

Research Team at RBS, notes that the US ISM manufacturing index fell in August from 52.6 to 49.4, signalling outright contraction in the factory sector for the first time since February.

Key Quotes

“All else equal, this raises the bar in terms of how strong the payroll gain in August (reported tomorrow) needs to be to push the Fed to act in September. Without signs of further progress on inflation and with these data raising some warning flags over a loss of momentum (at least in manufacturing) post-Brexit, we continue to believe this cautious, risk-adverse Fed is more likely to wait for more information rather than hike in September.

In August, only 6 industries (versus 12 in July) reported growth in the month. Key activity measures were disappointing. In particular, the new orders measure (a leading indicator of activity) slid from 56.9 to 49.1, and the production gauge tumbled from 55.4 to 49.6 (both marked the lows so far this year; the latter was the weakest since 2012).

The employment index also edged down for a second month, from 50.4 in June and 49.4 in July to 48.3 in August. As shown below, this suggests a weak result in terms of manufacturing payrolls in August. Inventories and unfilled orders both declined. Finally, on the inflation front, prices paid eased and the supplier deliveries gauge suggested fewer bottlenecks.”