By Lucia Mutikani
WASHINGTON, Sept 1 (Reuters) - U.S. manufacturing activity eased in August amid a slowdown in new orders and some manufacturers worried that higher prices because of the Middle East conflict and tariffs could undercut sales.
The survey from the Institute for Supply Management on Tuesday also noted price pressures driven by an artificial intelligence buildout. It could raise concerns about inflation broadening out and further bolster expectations of an interest rate increase this year.
The moderation in factory activity followed strong growth in July. Other data confirmed the labor market remained stable, with 1.05 job openings for every unemployed person in July, up from 1.01 in June.
Labor market stability could see the Federal Reserve raising rates as soon as this month to fight inflation.
"The continued availability to jobs relative to the number of unemployed, the extremely low layoff rate, the growing shortages and price increase in manufacturing, and the continued expansion in manufacturing activity nonetheless take the Fed another small step toward a rate hike on September 16," said John Ryding, chief economic advisor at Brean Capital.
The Institute for Supply Management said its manufacturing PMI fell to a still-elevated 54.6 last month from 55.6 in July, which was the highest reading since May 2022. Economists polled by Reuters had forecast the PMI would drop to 55.2.
The PMI has held above the 50 threshold this year, indicating growth in the manufacturing sector. Some of the retreat last month could be the result of the fading boost from businesses front-loading orders to avoid higher prices and shortages stemming from the six-month U.S.-Israeli war with Iran. Manufacturing, which accounts for about 9.4% of the economy, remains supported by the AI spending boom.
A further lift is expected from replenishment of business inventories, which have declined for five straight quarters, the longest such stretch since the Great Recession. But growing anxiety over the inflation fallout from the war and aggressive trade policy could offset some of the anticipated benefits.
About 58% of comments from respondents to the ISM survey last month were negative. Susan Spence, chair of the ISM Manufacturing Business Survey Committee, said pricing volatility dominated, followed by increasing lead times, the Iran war and tariffs. High steel and aluminum prices because of import duties were singled out by many manufacturers as a source of concern.
Manufacturers of transportation equipment reported that "high steel and aluminum prices due to Section 232 tariffs continue to make profitability a challenge." Producers of primary metals said they expected that the "year will remain difficult until the end."
Some makers of chemical products described the economy as "annoying" and "getting in the way of otherwise good business." They said they were "struggling to compete when prices escalate due to things like tariffs and the conflict in the Strait of Hormuz." Machinery manufacturers reported that "prices continue to rise on all goods" and had "moved more products to offshore sources to try to minimize cost impacts."
The AI boom was also driving up prices for electronics, with some manufacturers of computer and electronic products saying the market was "going through another crisis even bigger and more complicated than during and post COVID-19."
Fifteen manufacturing industries reported growth last month, including primary metals, textile mills, transportation equipment as well as machinery and computer and electronic products. The two industries reporting a contraction were wood and chemical products.
The ISM survey's new orders measure slipped to 53.7 last month from 56.7 in July. The pullback in orders did not ease the pressure on supply chains. The survey's supplier deliveries index increased to 59.3 from 58.9 in July. A reading above 50 indicates slower deliveries. The supply constraints meant inflation at the factory gate remained high last month.
BROAD PRICE INCREASES
The survey's gauge of prices paid for inputs was unchanged at 71.1, suggesting inflation could stay above the U.S. central bank's 2% target for a while.
Prices continued to increase for a range of goods, including aluminum, steel, copper products, electrical components, fuel, memory components and semiconductors. Copper, electrical components, steel and electronic components were among the goods that remained in short supply.
Fed Chairman Kevin Warsh said last Friday the central bank will "have work to do" if policymakers don't get the confidence they need that inflation is falling to the 2% target.
Financial markets are pricing in a roughly 66% chance that the Fed will raise its benchmark overnight interest rate by 25 basis points at its September 15-16 meeting, according to CME Group's FedWatch tool. The Fed funds rate is currently in the 3.50%-3.75% range.
Job openings, a measure of labor demand, had risen by 89,000 to 7.271 million by the last day of July, the Labor Department's Bureau of Labor Statistics said in its Job Openings and Labor Turnover Survey, or JOLTS report. Data for June was revised lower to show 7.182 million unfilled positions instead of the previously reported 7.359 million.
But the response rate to the JOLTS survey has dropped to just above 30% from around 58% before the COVID-19 pandemic. Some economists have also said the JOLTS survey could be overcounting job openings. The BLS pushed back against criticism of the JOLTS report in a paper published last week.
The labor market is viewed as being in balance. July's rise in unfilled jobs was led by the manufacturing sector, with an additional 79,000 vacancies, nearly all of them in the durable goods industries. There were 65,000 fewer job openings in the professional and business services sector. The overall job openings rate rose to 4.4% from 4.3% in June.
Hiring dropped by 278,000 to 5.054 million in July, led by a decline of 188,000 in the professional and business services sector. The hires rate fell to 3.2% from 3.4% in June. Layoffs and discharges decreased by 119,000 to 1.666 million, with the rate easing to 1.0% from 1.1% in June. Historically low layoffs mostly account for the employment gains this year.
A Reuters survey of economists expects nonfarm payrolls to have rebounded in August after a surprise decline in July. The government will publish its closely watched employment report on Friday.
"The report reinforced the story of a no-hire, no-fire labor market," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics. "Still, labor market conditions are balanced because weak hiring is being matched by fewer workers seeking jobs."
(Reporting by Lucia Mutikani; Editing by Paul Simao and Andrea Ricci )
