U.S. Manufacturing Activity Slows Marginally in August, ISM Index at 54.6

U.S. manufacturing activity expanded for an eighth consecutive month in August, with the ISM Manufacturing Index registering 54.6. This figure, while indicating continued growth, marked a slight deceleration from July's 55.6 and fell short of the consensus forecast of 55.2. Despite the marginal slowdown, the August reading remains the second-fastest pace recorded since 2022, underscoring persistent strength in the sector.

The underlying components of the index generally softened in August. The new orders index declined to 53.7 from 56.7, and the production index edged down to 58.3 from 58.5. The employment index also saw a decrease, falling to 51.2 from 52.8. Conversely, the supplier deliveries index increased to 59.3 from 58.9, suggesting potential challenges in supply chain efficiency or increased demand pressure. Notably, the prices paid index remained unchanged at 71.1, indicating stable but elevated inflationary pressures within the manufacturing supply chain, significantly above the 59.0 level observed at the start of the year.

Despite the headline decline, the manufacturing sector demonstrates encouraging resilience, driven by factors such as AI-related capital investment, domestic reshoring of production, and increased defense procurement. Fifteen of the eighteen major manufacturing industries reported growth in August, with only two sectors (Wood and Chemical Products) experiencing contraction. All major measures of activity, including new orders (53.7) and production (58.3), remained above the 50-point threshold, signaling continued expansion. This marks a positive shift from earlier periods, particularly for new orders, which had been weak through much of 2023.

The rebound in demand has translated into improved hiring trends, with the employment index remaining in expansion territory for the second consecutive month at 51.2. Although slightly slower than July, the underlying composition of employment growth has improved, with seven industries reporting increased hiring compared to three reporting contraction. This broader-based employment expansion suggests the recovery is extending beyond the most robust areas of the manufacturing sector. Order backlogs also continued their growth trajectory for the eighth month in 2026, reaching 51.8, after an extended period of contraction through 2023-2025.

In other economic news, construction spending declined by 0.5% in July, primarily due to a significant drop in homebuilding offsetting gains in office construction. On the labor front, initial jobless claims fell by 4,000 to 203,000 two weeks prior, while continuing claims decreased by 8,000 to 1.778 million.

Key terms

1. ISM Manufacturing Index: A monthly economic indicator based on a survey of purchasing managers in the manufacturing sector. A reading above 50 indicates expansion, while a reading below 50 indicates contraction.

2. New Orders Index: A sub-component of the ISM Manufacturing Index that measures the rate of new orders received by manufacturing companies, signaling future production.

3. Prices Paid Index: A sub-component of the ISM Manufacturing Index reflecting the prices manufacturers pay for raw materials and other inputs, serving as an indicator of inflationary pressures.

Source: This article is adapted from First Trust Portfolios' Data Watch commentary on this data release. The original is available at ftportfolios.com.