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US Manufacturing Registers Steepest Drop Since January 2014

After economist forecasts ranged from 50.7 to 53.4, the ISM index checks in at 49.4 for August, though the ISM factory chair maintains this might be an “anomaly” and that comments from purchasing managers don’t suggest there’s anything worrisome.

Manufacturing in the U.S. unexpectedly contracted in August for the first time in six months amid slumping orders and production that raise concern of renewed industrial weakness.

The Institute for Supply Management’s index dropped to 49.4, weaker than the most pessimistic estimate in a Bloomberg survey, from 52.6 in July, figures from the Tempe, Arizona-based group showed Thursday. The decline of 3.2 points was the biggest since January 2014.

Fresh orders to American factories shrank for the first time this year, as production was cut by the most since 2012 and employment fell, the report showed. The figures are surprising considering other data point to an economy that is bouncing back on the heels of still-robust consumer spending and progress in paring inventories.

“We’re still in a depressed manufacturing environment,” said Brett Ryan, a U.S. economist at Deutsche Bank Securities Inc. in New York. “That throws some doubt as to whether you can get to above-trend growth that the Fed needs to see over the back half of the year in order to take another step” in raising interest rates.

Eleven of 18 industries surveyed by the purchasing managers’ group posted a contraction, including electrical equipment, appliances and components; machinery; and apparel, leather and allied products. Among the six that reported growth were industries such as computer and electronic products; food, beverage and tobacco products; and chemicals.

The setback in manufacturing in August probably signals that companies remain hesitant to invest in equipment, with corporate leaders awaiting the outcome of the U.S. presidential election and assessing the global economy’s prospects.

An ISM index level below 50 shows contraction. The median forecast in a Bloomberg survey of economists called for a reading of 52, with estimates ranging from 50.7 to 53.4.

The survey’s chief said the latest report might be an “anomaly” and that comments from purchasing managers don’t suggest there’s anything worrisome: “We could get back on track very easily,” Bradley Holcomb, chairman of the ISM factory survey, said on a conference call with reporters. Holcomb said his own “level of concern is close to zero.” Prices and export orders are among positives in the report, he said.

Among the negatives was the group’s gauge of orders, which dropped to 49.1 in August from 56.9 a month earlier, the steepest slide since January 2014. Order backlogs deteriorated for a second month, reaching the weakest level since January and signaling output will continue to languish.

Less demand means producers have little reason to hire. The ISM’s gauge of factory employment fell to a five-month low of 48.3 from July’s 49.4. The measure has shown contraction in all but one month this year.

The report also showed measures of inventories at factories and at their customers were each close to 50, indicating stockpiles are about where they should be.

Combined with another month of growth in exports, whose gauge held at 52.5, and imports falling to 47 from 52, the report suggests the weakness in manufacturing, if sustained, may be related more to domestic demand.

By Shobhana Chandra, with assistance from Michelle Jamrisko.

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