American factories opened September with the worst possible combination for a central bank that has already signaled it is losing patience: growth that is slowing, and prices that are not.
The Institute for Supply Management's Manufacturing PMI registered 54.6 percent in August, released Tuesday morning at 10 a.m. ET. That missed the 55.2 consensus and marked a full point drop from July's 55.6, which had been the strongest reading since May 2022. The index has now spent eight consecutive months above the 50 line that separates expansion from contraction, so the sector is still growing — just less convincingly than it was a month ago.
The Sub-Indexes Tell a Split Story
Underneath the headline, the deceleration was concentrated in demand and hiring. The New Orders Index fell to 53.7 from 56.7 in July, and the Employment Index slipped to 51.2 from 52.8. Production ran the other way, jumping to 58.5 from 52.2 — a sign factories were working through existing backlogs rather than responding to fresh business.
The number that will matter most at the Federal Reserve, though, was the one that did nothing at all. The Prices Paid Index came in at 71.1 percent, unchanged from July and above the 70.0 forecast. Input costs in the manufacturing sector are running hot and have stopped decelerating, which is precisely the pattern policymakers cited when they began openly discussing tighter policy this summer.
Markets Read It as a Hike Signal
Equities sold off through the session. The S&P 500 closed at 7,633, down 0.69 percent, while the Dow Jones Industrial Average fell roughly 300 points, or about 0.5 percent, and the Nasdaq Composite dropped 1.1 percent. Semiconductors led the decline, with Nvidia, Advanced Micro Devices and Micron Technology each off around 2 percent. Microsoft and Alphabet lost more than 1 percent apiece.
The bond market did the real damage. The 10-year Treasury yield climbed to 4.78 percent, its highest intraday level since January 2025, and the 30-year reached 5.27 percent, near multidecade highs. Energy added to the pressure: West Texas Intermediate crude rose 3.11 percent to $88.43 a barrel, with Brent trading above $92 amid renewed U.S.-Iran tensions.
"There's a lot of macro variables right now that I think can fuel upside in volatility," said Adam Turnquist, chief technical strategist at LPL Financial, pointing to geopolitical risk and rising rate-hike expectations. Earnings remain strong, he noted, but "we're not in that chapter right now for the market."
Warsh's Warning Still Sets the Tone
The backdrop is Fed Chair Kevin Warsh's Jackson Hole keynote, which reset expectations for the September 15-16 FOMC meeting. "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed," Warsh said. "Otherwise, we have work to do. That's our job, our mandate and our charge to keep."
Before that speech, futures put roughly 70 percent odds on the Fed standing pat. Pricing has since flipped toward tightening, though the market is far from unanimous — CME FedWatch readings have run from the mid-50s to as high as 66 percent for a quarter-point hike, while Kalshi traders have held nearer 48 percent.
Tuesday's data did little to settle the argument. A cooling economy usually argues against hiking. Sticky input prices argue for it. With two weeks until the decision, both sides now have a fresh data point.
Sources: Institute for Supply Management (August 2026 Manufacturing PMI Report), Trading Economics, Investing.com Economic Calendar, CNBC, Yahoo Finance, FXStreet