US PMI Falls in August: What This Means for Interest Rates and Investments

The Purchasing Managers' Index (PMI) for the manufacturing sector in the United States fell to 54.6 in August, according to data released by the Institute for Supply Management (ISM). This figure was below both the July reading of 55.6 and the economists' projection of 55.2.

On its own, the decline could be interpreted as a sign of relief for those anticipating interest rate cuts by the Federal Reserve. However, the crucial detail lies elsewhere in the report: the sub-index of prices paid for inputs remained stable at 71.1. This level indicates persistent inflationary pressure at the factory gates. For Brazilian investors monitoring the American monetary cycle, this data changes the calculation.

Growth Slows, But Does Not Reverse

First and foremost, it is essential to put the number into perspective. A PMI of 54.6 still represents expansion. The indicator has remained above the threshold of 50 throughout 2026, contrasting with much of 2023 and 2024, when American manufacturing flirted with contraction for several consecutive months.

The July reading of 55.6 was the highest since May 2022, at the peak of the post-pandemic reopening cycle. Therefore, the decline in August is more of a natural adjustment than a reversal of trend. The manufacturing sector, which accounts for about 9.4% of the American economy, continues to be supported by two main vectors: the expansion of artificial intelligence infrastructure and the need to replenish inventories, which have been declining for five consecutive quarters, the longest streak since the Great Recession of 2008-2009.

The demand for chips, servers, and components related to AI data centers has been one of the engines of global manufacturing, and ISM data confirms that this cycle has not yet lost momentum.

New Orders Decline and Employment Weakens

The sub-index of new orders fell from 56.7 to 53.7, a significant drop of three points. Part of this contraction has a specific explanation: in previous months, companies anticipated orders to protect themselves from higher prices and potential supply disruptions related to the ongoing conflict between the United States, Israel, and Iran, which has lasted for six months. As this anticipation effect dissipates, orders naturally declined.

On the employment side, the ISM indicator dropped to 51.2, after reaching 52.8 in July, the highest level since August 2022. However, this data needs to be read with caution. Historically, this ISM sub-index has been a poor predictor of actual industrial employment reported by the Department of Labor. Economists surveyed by Reuters estimate that manufacturing employment likely remained weak in August, even as total non-farm jobs recover after the unexpected drop in July.

The official employment report, the payroll, will be released on Friday and is expected to be the most important data of the week for the markets. A result of 7.3 million open sector jobs, as indicated by the Department of Labor for July, was slightly below projections, signaling a cooling labor market but without collapsing.

Price Pressure Stalls Discussion on Interest Rate Cuts

The central point of the ISM report for investors is the price sub-index. It remained unchanged at 71.1. This level indicates that American factories continue to pay significantly more for raw materials, components, and transportation.

Supply chains remain under strain. The supplier delivery sub-index rose from 58.9 to 59.3. Values above 50 indicate longer delivery times, meaning unresolved logistical bottlenecks. These bottlenecks feed into producer inflation and, with a lag, can contaminate consumer prices.

For the Federal Reserve, which is pursuing a 2% inflation target, this scenario is uncomfortable. Economic activity is slowing, which would normally open the door for interest rate cuts, but prices remain at levels that make it difficult to justify aggressive monetary easing. This is the scenario some economists refer to as "mild stagflation": growth loses traction while inflation does not relent.

What Changes for Investors in Brazil

The spot dollar closed Monday's session at R$ 5.1814, down 0.28%. A Fed that takes longer to cut rates tends to keep the dollar stronger globally, which pressures emerging currencies and may limit the Brazilian Central Bank's ability to reduce the Selic rate more quickly.

For allocation in risk assets, the message is one of caution. Stocks linked to industrial commodities may feel the effect of the slowdown in orders. On the other hand, sectors related to artificial intelligence and digital infrastructure continue to have favorable winds, as the expansion of AI is precisely what sustains manufacturing above the contraction threshold.

The market is now focused on Friday's payroll. If the employment data comes in weaker than expected, the thesis for rate cuts gains strength, even with persistent input inflation. If it comes in strong, the Fed will have even less incentive to act. The August PMI provided the context. The payroll will deliver the verdict.