Stocks drop as manufacturing activity slumps

Manufacturing investment and activity are slowing down ahead of a possible shift in the business cycle as the Federal Reserve weighs a cut in interest rates later this month.

S&P Global’s Purchasing Managers’ Index (PMI) dropped to an eight-month low, coming in at 47.9 in August, down from 49.6 in July.

S&P reported production cuts for the first time since January.

“New orders inflows fell in August at the sharpest rate for 14 months, with export orders declining at the steepest rate for a year,” the market research firm reported.

The purchasing index from the Institute for Supply Management advanced on the month but fell short of expectations, coming in at 47.2 from 46.8 in August.

A survey respondent from the chemicals sector said there was a “noticeable slowdown in business activity. Staffing and production rationalization has been triggered. Previous optimism about future growth has been dashed.”

Markets were down significantly on the news, with the Dow Jones Industrial Average of major U.S. stocks dropping more than 450 points in Tuesday morning trading. The S&P 500 index was down more than 1.5 percent.

The U.S. economy is likely at an inflection point following an uptick in unemployment in July, which rose to 4.3 from 4.1 percent, triggering an important recession indicator called the Sahm rule.

The Fed has left interest rates between 5.25 and 5.5 percent for the last year as the economy has boomed during the postpandemic recovery. But elevated borrowing costs appear to have taken a toll on labor conditions, and the Fed is widely expected to start cutting rates in September.

Markets expect a quarter-point cut over a half-point cut with a probability of 63 percent versus 37 percent, according to futures contract prices measured by CME Group’s FedWatch algorithm.

Slack is also appearing in commodity markets, as the August S&P Global PMI commodity price and supply indicators delivered the fewest reports of commodity shortages within global manufactures since early 2020.

“Reports of both price pressures and supply shortages remained subdued midway through the third quarter, with the respective indices easing slightly on the month,” S&P economist Usamah Bhatti said in a commentary.

Construction investment also fell in July, dropping to a seasonally adjusted annual rate of $2,162.7 billion from the June estimate of $2,169 billion, according to the Census Bureau. Private construction was down 0.4 percent while public construction was up 0.1 percent.

Outside of the business cycle, a secular slowdown in manufacturing construction investment may be coinciding with more regular market forces in the manufacturing sector.

Manufacturing construction investment has been skyrocketing 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 percent from July 2023 and 0.1 percent from June, but has noticeably decelerated since March. It appeared to hit a peak in August of last year before accelerating once again.