The IHS Markit Flash U.S. Manufacturing PMI contracted ever so slightly in August for its first decline since September 2009. The headline index dropped from 50.4 in July to 49.9 in August, or just below neutral, led by declines in new orders and exports. While manufacturers remained positive in their outlook for the next six months, that optimism has waned notably year-to-date. In addition, raw material costs have decelerated to the slowest rate since June 2017.
In a similar way, manufacturing activity in the Kansas City Federal Reserve Bank’s district contracted for the second consecutive month in August, with survey respondents citing softer overall demand, trade uncertainties and the inability to attract new talent as top concerns. This contrasts with modest expansions seen in the New York and Philadelphia Fed districts in August.
Manufacturing activity in France rebounded in August after briefly contracting in July, with progress across the board. In contrast, German manufacturers continued to struggle, with the decline in activity not far from its worst reading in seven years. Indeed, survey respondents in Germany were also pessimistic about future output, with that measure plummeting from 43.1 to 39.9, the lowest point since the question was added in 2012.
According to Freddie Mac, the average 30-year fixed rate mortgage ratedropped to 3.55 percent last week, the lowest since November 3, 2016. More importantly, this rate has fallen 139 basis points since peaking at 4.94 percent on November 15, 2018, roughly nine months ago.
The housing market data last week were mixed. Existing home sales were up 2.5 percent in July, the best reading since February. This news suggests that reduced mortgage rates have produced some traction in the market despite lingering challenges with affordability and the lack of sufficient workers.
Meanwhile, new single-family home sales dropped sharply, down 12.8 percent in July. However, this decrease came from a significant upward revision to the June data. New home sales declined from 728,000 units in June, its best reading since July 2007 and up from the previous estimate of 646,000, to 635,000 units in July. The Federal Reserve remained in focus last week after Chair Jerome Powell delivered his speech in Jackson Hole, Wyoming, and after the minutes of the previous Federal Open Market Committee meeting were released. While the minutes reflect some disagreement over the need for additional rate cuts, I continue to expect the FOMC to reduce short-term interest rates at the September 17–18 meeting, following the 25-basis-point reduction made at the July 30–31 meeting. However, I also expect the Federal Reserve to hold rates after that to assess incoming data and economic conditions, but that could change if the situation warrants further action.