Dive Brief:

• U.S. manufacturing last month persisted in recession mode amid declines in production, new orders, supplier deliveries and export orders, the Institute for Supply Management said Tuesday.
• The institute’s manufacturing index in August rose 0.4 percentage point to 47.2% compared with July but, with a reading below 50, still shows signs of contraction. The sector has shrunk for five straight months, according to ISM.
• “Demand remains subdued, as companies show an unwillingness to invest in capital and inventory due to current federal monetary policy and election uncertainty,” Timothy Fiore, chair of ISM’s manufacturing business survey committee, said in a statement.

Dive Insight:

Confronting falling demand, manufacturers trimmed production in August for the first time in six months, S&P Global said in a report Tuesday on its U.S. manufacturing PMI.

“A further downward lurch in the PMI points to the manufacturing sector acting as an increased drag on the economy midway through the third quarter,” S&P Global Chief Business Economist Chris Williamson said in a statement.

Facing unexpectedly slow sales, manufacturers have filled warehouses with unsold stock and cut production for the first time since January, Williamson said. They are also shrinking payroll and cutting back on inputs.

“The combination of falling orders and rising inventory sends the gloomiest forward-indication of production trends seen for one and a half years, and one of the most worrying signals witnessed since the global financial crisis,” he said.

Following the release of the manufacturing data, the Federal Reserve Bank of Atlanta marked down its estimate of Q3 economic growth to 2% on an annualized basis from 2.5% on Friday.

Manufacturing, while generating just 11% of U.S. economic growth, fuels expansion in related sectors. It also signals the trajectory for the economy.

Indeed, the ISM’s manufacturing index reading of last month suggests that the economy will grow 1.3% on an annualized basis, Fiore said.

Inflation, although slowing since Q1, persists as a headwind, Fiore said, pointing to a component of the manufacturing index that gauges price trends.

“The prices index indicated expansion in August at a faster rate compared to the previous month,” he said. “Commodity prices continue to be volatile, especially oil, natural gas, aluminum, corrugate, freight transportation and plastic resins.”

The employment index, meanwhile, rose 2.6 percentage points, suggesting that prospects are improving for manufacturing employees.

The S&P Global index flagged a bleak outlook for workers, noting a decline in employment during August.

Producers are “reducing payroll numbers for the first time this year and buying fewer inputs amid concerns about excess capacity,” Williamson said.

U.S. stocks fell after release of the gloomy manufacturing data, with the Standard & Poor’s 500 index declining 2.1%.