Manufacturing, Construction Fall as U.S. Economy Shows Weakness

Both manufacturing and construction in the U.S. saw anemic growth in September, counter to expectations for a steadily improving American economy.

The Institute for Supply Management released its September 2014 PMI, which fell 3.4 points to 56.6% from the prior month. This is the second consecutive month of steep declines in the ISM index, indicating that demand for manufactured goods in the U.S. and abroad is weakening.

Both manufacturing and construction in the U.S. saw anemic growth in September, counter to expectations for a steadily improving American economy.

The Institute for Supply Management released its September 2014 PMI, which fell 3.4 points to 56.6% from the prior month. This is the second consecutive month of steep declines in the ISM index, indicating that demand for manufactured goods in the U.S. and abroad is weakening.

The ISM said that, while manufacturing was expanding in the U.S., growth was on the decline as a result of labor shortages and “continuing concern over geopolitical unrest”. Only customer inventories, production, and prices were growing faster than the prior reading, while new orders, exports, imports, and inventories were showing decelerating growth. 

The acceleration in prices, which rose 2.5% from August’s readings according to the PMI, suggests that the U.S may begin to experience inflation without growth.

The ISM also saw a decline in employment, despite employers complaining of a shortage of labor supply. The ISM Employment Index fell to 54.6 in September, down 3.5 points from the prior month. Any number above 50 indicates an expansion in total employment, but the growth rate has slowed for the second month in a row after reaching its peak in July.

Anemic Construction Spending

While manufacturing growth remains lackluster, construction spending has also declined in a sign that American growth is getting less robust.

According to the Department of Commerce, construction spending fell 0.8% month-over-month to $961 billion in August, but 5% higher than a year ago. Analysts had expected a 0.5% month-over-month increase.

Leading the decline in demand was public construction, which fell 0.9% month-over-month to $275.9 billion on continued cost cutting from local and federal governments. Private construction fared only marginally better, with a 0.8% decline to $685 billion.

The news comes as a surprise to economists, who had predicted a steady and accelerating growth rate for construction alongside growing manufacturing demand, as employment rates improve and aggregate demand, at least theoretically, would rise alongside it. Additionally, geopolitical uncertainty has led some to expect an influx of capital into the U.S. from Europe and China, which would bolster both sectors.

Both public and private construction remains far below their peaks. In 2006, residential construction rose to nearly $700 billion, almost double its current level.

Forward Expectations Weaken

U.S. equities fell on news of both reports as additional fears from unrest in Hong Kong and growing tensions in Ukraine exacerbated stock market volatility globally. Stocks in construction, materials, and homebuilder companies suffered widespread losses Wednesday on the news.

Recently, economists downgraded their GDP projections for the U.S. in the third quarter, citing weak demand and low jobs and wages growth as headwinds to the economy. Lagging construction and manufacturing growth are likely to lower projections even further.