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September 4, 2019

American manufacturing contracted. Here's what comes next

By Julia Horowitz | CNN Business

Those who have argued that the United States can withstand the weakness hitting global factories just received a shock: the American manufacturing sector shrank last month, according to the Institute for Supply Management. It's the first time that's happened since August 2016.

Against expectations, the group's manufacturing index, a key gauge for the industry, came in at 49.1 as the trade war hit sentiment. Any number below 50 indicates a contraction.

So what happens now? Societe Generale strategist Kit Juckes points out that this is the third time that the US manufacturing ISM has dropped below 50 since the financial crisis, and the previous two events did not trigger recessions. But it's definitely not a positive signal.

In the near term, the survey's biggest impact has been to increase expectations for a larger interest rate cut by the Federal Reserve later this month. The odds of a 50-basis point cut are now at more than 9%, up from 0% on Tuesday, according to CME Group's FedWatch tool.

But we'll get a much better picture of what the Fed is working with by the end of the week. The Institute for Supply Management's non-manufacturing index arrives Thursday. That's followed, of course, by a blockbuster August jobs report on Friday.

Investor insight: It's important to stay focused on manufacturing, especially given the international backdrop. The current downturn in global manufacturing extended to its fourth month in August, according to JPMorgan's Global Manufacturing PMI, based on surveys with thousands of executives in over 40 countries.

But manufacturing drives about 11% of US economic output. Should it become clear that the factory slowdown is bleeding over into the services sector, that would pack a bigger punch — especially because of what it would mean for jobs. Watch this space.

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