Manufacturing investment and activity are slowing ahead of a turn in the business cycle as the Federal Reserve considers cutting interest rates later this month.
The S&P Global Purchasing Managers' Index (PMI) fell to 47.9 in August from 49.6 in July, the lowest level in eight months.
S&P reported its first production cuts since January.
“New orders fell at their sharpest rate in 14 months in August, while export orders fell at their steepest rate in the past year,” the market research firm reported.
The Institute for Supply Management's Purchasing Managers' Index rose from the previous month but fell short of expectations, falling to 47.2 from 46.8 in August.
“There has been a notable slowdown in business activity, which has triggered workforce and production rationalisation. Previous optimism about future growth has been dashed,” said a survey respondent in the chemicals sector.
The news sent markets plummeting, with the Dow Jones Industrial Average, the main U.S. stock index, falling more than 450 points in morning trading on Tuesday, and the S&P 500 Index dropping more than 1.5%.
The U.S. economy is likely reaching a tipping point after the unemployment rate rose to 4.3% from 4.1% in July, triggering a key recessionary indicator known as the thumb rule.
The Fed has kept interest rates steady at 5.25% to 5.5% over the past year as the economy has performed well during the post-pandemic recovery, but rising borrowing costs appear to be hurting working conditions and the Fed is widely expected to start cutting rates in September.
According to futures contract prices measured by CME Group's FedWatch algorithm, the market expects a 0.25-point cut 63% more likely than a 0.5-point cut, with the probability of a 0.5-point cut being 37%.
Slackening was also seen in commodity markets, with the S&P Global PMI Commodity Price and Supply Index for August reporting the fewest commodity shortages in global manufacturing since the start of 2020.
“Reports of price pressures and supply shortages were both subdued mid-quarter, with each index down slightly from the previous month,” S&P economist Osama Bhatti said in a commentary.
Construction investment also fell in July, with seasonally adjusted annual growth falling to $2.1627 trillion from an estimated $2.169 trillion in June, according to the Census Bureau. Private construction fell 0.4%, while public construction increased 0.1%.
Outside of the business cycle, a secular slowdown in manufacturing construction investment may be consistent with more normal market forces in the manufacturing sector.
Manufacturing construction investment has surged in recent years as U.S. fiscal policy has reinvigorated the manufacturing sector, jumping to $237 billion after hovering around $80 billion between 2015 and 2020.
It's still up more than 20% from July 2023 and 0.1% from June, but it has slowed notably since March, appearing to peak in August last year before accelerating again.
