Weak manufacturing data raises specter of US economic slowdown

The Institute for Supply Management’s monthly survey of purchasing managers showed that only 47.2 percent of them reported expansion during the month, below the 50 percent breakeven point for activity.

Although this rate was slightly higher than the 46.8 percent recorded in July, it was lower than the Dow Jones forecast, which was indicating a rate of 47.9 percent.

“While U.S. manufacturing activity remains in contraction territory, it contracted more slowly than last month. Demand remains weak, output has declined, and inputs remain accommodative,” Timothy Fiore, chairman of the Institute for Supply Management’s Manufacturing Business Survey Committee, said in a report published by CNBC and seen by Sky News Arabia Economy.

“Demand remains weak, with businesses showing an unwillingness to invest in capital and inventory due to current federal monetary policy and electoral uncertainty,” he added.

While the index level indicates a contraction in the manufacturing sector, Fiore noted that any reading above 42.5 percent generally indicates expansion in the broader economy.

Another weak economic reading points to the likelihood of the Federal Reserve cutting interest rates by at least a quarter-point later this month. Following the ISM report, traders raised the odds of a more aggressive half-point cut to 39 percent, according to the CME Group’s FedWatch gauge.

According to the survey, the employment index rose to 46 percent while inventories jumped to 50.3 percent. As for inflation, the price index rose to 54 percent, which may give the Fed some time to decide how far to fully cut interest rates.

The ISM results were supported by another reading of the Standard & Poor’s Purchasing Managers’ Index, which showed a decline to 47.9 points in August from 49.6 points in July.

The S&P employment index fell for the first time this year, while a gauge of input costs rose to a 16-month high, another sign that inflation is still here if far from its mid-2022 highs.

“The further decline in the PMI suggests that the manufacturing sector is acting as an increasing drag on the economy in the middle of the third quarter. Forward-looking indicators suggest that this pressure could intensify in the coming months,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

Economic challenges

For his part, former advisor to the US State Department, Hazem Ghabra, said in statements to the Sky News Arabia Economy website that the US economy faces several challenges that have contributed to the current situation, including:

• The cost of borrowing increases due to high interest rates, which negatively affects investment within companies, as well as the consumer who finds it difficult to cover his basic needs.
• President Joe Biden’s renewable energy project launched two years ago has failed to achieve its goals due to government challenges, particularly environmental laws related to the battery industry and raw materials that are in short supply and costly.
• Lack of confidence in the future, as the decline in confidence compared to the past has led to a reduction in the expansion of companies and a decrease in the consumption of citizens.
• The ongoing effects of the Corona pandemic, which continue to affect companies and the American market in general, as it is difficult to ignore the long-term repercussions that the crisis has had on the market.

Key factors

For his part, the economic expert and chief economist at ACY, Dr. Nidal Al-Shaar, in his interview with the Sky News Arabia Economy website, attributed the challenges facing the American economy to several factors, including:

• The weakness of the purchasing managers index in the manufacturing sector in the United States and the world, as a natural result of the significant decline in demand that followed the Corona pandemic, which in turn affected consumption and industrial production.
• Industrial production rates are declining, with increasing inventory and stockpiling of goods, along with reduced inputs to industrial processes, indicating the possibility of the economy entering an uncontrollable recession, with a decline in the volume of global industrial exports.
• Geopolitical tensions and the US-China trade war, which are exacerbating rising prices and disrupting supply chains, in addition to the ongoing Russian-Ukrainian war and instability in the Middle East, which are increasing fears of a possible economic recession.
• The escalation of protectionist policies by some countries, most notably the United States, is an important factor that may contribute to the exacerbation of the global economic recession.

Al-Shaar added: “The coming period will not be encouraging, as we are facing a new economic phase whose title is a rapid decline in the volume of total demand.”

slowdown

In this context, Dr. Walid Gaballah, a member of the Egyptian Society for Economics and Legislation, explained in his interview with “Sky News Arabia Economy” that the current slowdown in US economic activity was expected and reflects the awareness of US policymakers who are betting on the economy’s ability to withstand it for a specific period. This slowdown is considered a natural result of the US Federal Reserve’s policies that insist on excessively raising interest rates.

Jaballah pointed out the main reasons that led to this situation, including:

• The Federal Reserve’s policy of raising interest rates aims to absorb liquidity from the markets to control inflation. Although this policy has succeeded in pushing inflation down, the challenge lies in the high cost of financing economic activities, which has led to a reduction in expansion plans for American companies.
• The reduction in liquidity in the market reduces the ability of the American citizen to consume, which leads to a decrease in demand for goods and services. Consequently, economic, commercial and industrial activity declines, which was evident in the decline in the US Purchasing Managers Index to below the break-even level.
• Rising energy costs as a result of US sanctions on China, Russia and other markets, hampering US companies’ ability to expand export production.

“I think US economic activity could improve if the Fed backs down from raising interest rates and moves toward the expected cut,” Jaballah concluded.