Could this U.S. economic figure point to upcoming growth? Wolfe Research weighs in

U.S. manufacturing activity remained in contraction for a sixth consecutive month in August, with the ISM PMI at 48.7, reflecting ongoing tariff impacts. However, the forward-looking new orders sub-index notably jumped to 51.4, prompting Wolfe Research to suggest a potential 'early acceleration' in the business cycle. Despite this mixed signal, with production and employment remaining weak, analysts identify easing tariffs, Federal Reserve policy, and fiscal stimulus as crucial catalysts for a sustained shift to an early-cycle economic environment.

Analysis

The U.S. manufacturing sector registered its sixth consecutive month of contraction in August, with the ISM PMI at 48.7, reflecting the persistent impact of import tariffs. Despite this headline weakness, a significant positive divergence emerged in the forward-looking new orders sub-index, which jumped to 51.4 from 47.1, marking its first expansionary reading in six months. This has led analysts at Wolfe Research to posit that the economy may be entering a nascent 'early acceleration' phase of the business cycle. However, the overall report remains mixed, as the production sub-index weakened into contraction and the employment gauge, at 43.8, indicates that firms continue to reduce headcount rather than hire. Wolfe Research suggests the business cycle will likely oscillate without a clear direction until year-end, conditioning a sustainable shift to an early-cycle environment on three key catalysts: an easing of trade tariffs, a loosening of financial conditions by the Federal Reserve, and the implementation of fiscal stimulus.

Key Decisions for Investors

• Given the tentative signal of an 'early acceleration' from new orders, investors might consider a cautious, incremental rotation into early-cyclical stocks while acknowledging the risk of continued oscillation.
• Investors should closely monitor developments in U.S. tariff policy, Federal Reserve monetary policy, and fiscal stimulus measures, as these are identified as the primary catalysts needed for a sustainable economic upswing.
• Given the persistent weakness in headline PMI, production, and employment, maintaining portfolio hedges against a continued slowdown is prudent until a broader improvement in manufacturing data confirms the positive signal from new orders.