Manufacturing Sector's Red Alert: Market Plunge and Economic Implications

Let's start by discussing the ISM manufacturing data released today. We all know that the U.S. economy is at a pivotal point, and any information could sway investors' judgment on the future economy. The market's significant drop today is closely related to this economic data. So, what exactly happened in the U.S. manufacturing sector in August, and what economic clues did it provide? Let's take a look.

The data shows that in August, the U.S. manufacturing PMI index was 47.2, slightly below the expected 47.5, still in the contraction zone, but slightly higher than last month's 46.8. This indicates that the U.S. manufacturing industry continues to be sluggish. The only good news is that it has not further deteriorated. Manufacturing companies are approaching a critical point, and more and more companies are beginning to rethink their plans for the second half of the year and the future. If demand does not pick up, it is very likely that layoffs will be forced to protect themselves. So, how is this time?

The new orders index, which represents future demand, plummeted by 2.8 points to 44.6, setting a new low since May 2023. Output also declined by 1.1 points to 44.8. Employment, however, saw an increase, rising to 46, up by 2.6 points from the previous month. Prices also rose, increasing by 1.1 points to 54, the only indicator still in expansion. The overall tone of the company interviews in the report is negative, with companies preparing to cope with further slowdowns in the future and closely monitoring consumer behavior to see if there will be a decline beyond seasonal influences.

The head of ISM's manufacturing survey said that demand remains weak, and companies are still reluctant to invest due to the uncertainty of future monetary policy and the upcoming elections. The further decline in output is causing profit pressure. However, compared with July, there is some improvement, while in July, there was no industry expansion. Next, let's focus on analyzing demand and employment to see if there are any new changes.

In terms of demand, the new orders index has not shown continuous expansion since May 2022, with more companies expressing concerns about future uncertainty and the continued sluggishness of orders. In terms of the proportion of responses, the ratio of positive to negative demand evaluations is 1 to 1.6, and confidence in the future has reached the lowest level since the pandemic. If we look at the overall comments, companies are still considering layoffs, with the ratio of hiring to firing comments at 1 to 1.2. That is to say, without the support of the food industry, this time the employment index would also likely decline.

The continued contraction of the manufacturing industry has always been a red light in the economy because, historically, manufacturing has been a leading indicator of the economy. This means that the manufacturing industry still has the potential to drag the economy into a recession, especially if companies ultimately decide to lay off large numbers of employees to protect themselves. For us investors, this means that we still need to remain vigilant about the economy. However, according to this report, although companies are generally negative, they are not particularly nervous, and the future still needs to be observed. An important point of observation is that after the Federal Reserve's interest rate cut this month, we need to see if there is a recovery in new orders. Once the manufacturing new orders show a continuous expansion, we can say that the manufacturing industry has shaken off the danger, which will be an important signal for the confirmation of a soft landing.