Key Takeaways
- Two indicators of manufacturing activity depicted sluggish activity in the sector.
- Manufacturing activity, which is often used as a measure of economic growth, has been significantly impacted by higher borrowing costs, economists said.
- Economists say the factory sector will be stuck in neutral until the Federal Reserve lowers interest rates.
Because of increased borrowing, the manufacturing industry remained weak in August.
Despite promising reports on inflation and retail sales in July, the U.S. factory sector continues to be weighed down by high interest rates. While the Institute of Supply Management (ISM) manufacturing Purchasing Managers’ Index (PMI) increased in August, it was below the 50% threshold that indicates expanding business activity— for the fifth straight month.
Economists got similar data from S&P Global, whose manufacturing PMI survey registered its first decline in seven months. “Manufacturing was stuck in low gear in August, held back by high interest rates, election uncertainty, the strong U.S. dollar, and weak foreign markets,” wrote Bill Adams, Comerica Bank chief economist.
Factory Sector Remains in Slowdown While Economy Chugs Along
Economists often look at manufacturing data for indications of consumer demand, as more goods produced can mean more sales and potentially serve as a measurement of the broader economy. However, that hasn’t been the case in recent months.
“Today’s report for August activity is broadly consistent with a theme that has been in place for the better part of the past two years: the economy is still expanding even if the factory sector is not,” wrote Wells Fargo economists Tim Quinlan and Shannon Seery Grein.
Economists said the manufacturing sector wasn’t likely to rebound until the Federal Reserve lowers interest rates from their decades-high levels. Manufacturers often need loans to purchase materials, inventory, and capital equipment for factories, and higher borrowing costs often impact industrial production.
“The Fed is expected to cut rates in September, but the manufacturing index will likely stay subdued until rates come down meaningfully,” wrote Priscilla Thiagamoorthy, BMO Capital Markets senior economist.