United States factory activity decreased during the month of August after six consecutive months of increases. New orders, as well as production, fell. However, a low level of layoffs continues to look at an increase in economic growth during the third quarter. Although manufacturing is still restricted by the continuous effects of a strong dollar and decreased oil prices, a robust labor market could inspire the Federal Reserve to increase interest rates later during 2016.
“Today’s disappointing (manufacturing) number further weakens the case for a rate hike later this month, but we currently see no reason to change our Fed call and continue to anticipate a rate hike at the December meeting,” Harm Bandholz, chief U.S. economist at UniCredit in New York, said.
The Institute for Supply Management (ISM) stated that its index of national factory activity decreased by 3.2 percentage points to a reading of 49.4 during the month of August. That was the first decrease since February. A reading under 50 indicates a fall in manufacturing, which takes up approximately 12 percent of the United States economy. The dollar’s rise between June 2014 and December 2015, as well as lackluster global demand, have restricted export growth.
A decrease in oil drilling activity, which came after a fall in oil prices, has also impacted manufacturing by lowering business spending, leading to lackluster demand for heavy machinery. In addition, a United States inventory correction has led to factories receiving fewer orders. While surveys including the ISM and several regional reports have pointed to manufacturing weakness, so-called hard data on oil drilling rigs, durable goods orders, and industrial production have given indications of balance in the sector. During August, the ISM’s new orders subindex decreased by 7.8 points to a reading of 49.1. Production also fell into the red territory, and factory employment decreased more. But the manufacturing employment slowdown has yet to reach out to other parts of the economy.