On September 3, U.S. stocks experienced a sharp decline due to weak manufacturing reports and a decrease in construction spending. This raised concerns about a potential economic slowdown.
At the end of the trading day, the benchmark S&P 500 index closed with a loss of 118.64 points or 2.10 percent, settling at 5,529.76 points. The Nasdaq also dropped 576.06 points or 3.25 percent, reaching 17,137.56. The Dow Jones Industrial Average fell 618.72 points or 1.49 percent, closing at 40,944.36.
The decline in treasury yields indicates that investors sought refuge in the perceived safety of bonds. This shift came after the release of manufacturing data by the Institute for Supply Management (ISM) and S&P Global, both of which revealed significant weakness in the manufacturing sector. Some analysts speculate that this points towards a substantial slowdown in economic growth.
“Investors are now concerned if we are heading into a recession faster than anticipated or whether the Federal Reserve has control of the situation with future rate cuts,” commented Robert Pavlik, Senior Portfolio Manager at Dakota Wealth in Fairfield, Connecticut. He further emphasized that the weak manufacturing data certainly didn’t help ease these concerns.
Slower sales have led to warehouses being filled with unsold inventory. In response, factories have cut production for the first time since January. Additionally, producers are reducing payroll numbers and buying fewer inputs due to concerns about excess capacity, explained Chris Williamson, Chief Business Economist at S&P Global.
This combination of falling orders and rising inventory indicates the gloomiest forward-indication of production trends seen in the past one and a half years. It represents one of the most concerning signals observed since the global financial crisis.
Demand remains weak as companies display reluctance to invest in capital and inventory amid current federal monetary policy and election uncertainty. Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee, stated that despite falling demand and production, factory costs have increased. Rising wages and high shipping rates led to a rise in input costs, which experienced their fastest pace of growth since April 2023, suggesting a possible stagflationary trend.
Analysts at ING express concern that the manufacturing data indicates a significant slowdown in economic output. “There is a worrying narrowing of the pockets of strength,” noted James Knightley, Chief International Economist at ING. He added that historically, such weakness in output and orders points to a sharp deceleration in GDP growth.
Knightley highlighted the softening trend and the less promising outlook for residential construction due to the ongoing weakness in home builders’ sentiment and limited affordability. He also mentioned that two consecutive negative monthly prints suggest a notable cooling in nonresidential construction. Furthermore, the construction spending report suggests that support from the Inflation Reduction Act is dwindling, with construction activity associated with semiconductor manufacturing appearing to decline.
Given the sluggishness in manufacturing and construction, there will be an increasing reliance on the service sector to drive economic growth, according to Knightley.
In addition to the slump on Wall Street, European stocks also experienced a sharp decline in their worst session in nearly a month. The gloomy U.S. manufacturing data reignited concerns about a slowdown in global growth.
The pan-European STOXX 600 index closed with a decrease of almost 1 percent. Germany’s DAX, previously reaching record highs, slipped by over 0.9 percent during the session. Stocks in France, Spain, and Italy also dropped by varying percentages between 0.9 and 1.3 percent.
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