The Institute for Supply Management (ISM) report fell .2% in August to 49.6 from July’s reading of 49.8. This was the third consecutive month in which manufacturing contracted. Any reading below 50 signifies contraction.
Expectations were for the report to show slight advancement to 49.9. Although some segments of the economy are showing improvement—particularly housing—others are dragging their feet. The uneven nature of the recovery may provide the catalyst for Fed action when it meets September 12 and 13.
Manufacturing is contracting all over the globe, not just in the US. Europe’s numbers showed a decline in new orders. China’s manufacturing activity fell the most in August since the bottom of the financial crisis in 2009.
US businesses also have adopted a more cautious outlook since inventories took a leap to 54 from 49 in spite of drops in other methods of measuring new orders and backlogs.
Backlogs are a good sign in a strong, healthy economy but not so good for a struggling one. Rather than instilling confidence, such backlogs mean manufacturers will likely have to cut production until the inventories clear out.
Government spending cuts are affecting the construction side but there is good news there since construction on new single family homes increased 1.5% in the most recent report.
There are two hurdles the economy must surmount if the recovery is to even out. One is weather growth in the US will be dampened by the continued contraction in global economies like Europe and China. The other is whether the economy will stall from the fiscal cliff anticipated when current tax laws expire at the end of the year.

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