Economic activity in the U.S. manufacturing sector expanded in August for the third straight month, the Institute for Supply Management (ISM) reported Tuesday.
The Purchasing Managers' Index (PMI) stood at 56 percent, up 1.8 percentage points from the July reading. Any reading above 50 percent indicates the manufacturing sector is generally expanding.
"That marked the highest level for the index since late 2018," Sarah House and Tim Quinlan, senior economists at Wells Fargo Securities, wrote in an analysis, noting that the production index registered 63.3 percent, and new orders index climbed to a 17-year high of 67.6.
The economists, however, noted that while the recovery may be broadening, the ISM report raises a number of "caution flags" regarding the sustainability of the recovery.
Despite the high reading on new orders, the employment component, at 46.4 percent, is consistent with manufacturers continuing to lay off workers, House and Quinlan noted.
"The need to further pare back employment, even if at a slower rate as seen in August, highlights that overall demand remains weak and manufacturers are not fully convinced that the recovery is durable," they said.
Timothy Fiore, chair of the ISM's manufacturing business survey committee, also noted that "survey committee members reported that their companies and suppliers operated in reconfigured factories, with limited labor application due to safety restrictions."
"Panel sentiment was generally optimistic (1.4 positive comments for every cautious comment), though to a lesser degree compared to July," Fiore said.
After three months of contraction amid mounting COVID-19 fallout, the economic activity in the manufacturing sector rebounded in June, as states gradually eased lockdown measures and reopened their economies. The expansion continued in July amid a resurgence in new COVID-19 infections.
"Looking ahead, as the pandemic drags on, lingering softness in sales and an uncertain global outlook will weigh on capital spending, so manufacturers -- even those tied most tightly to goods spending -- are hardly in the clear," House and Quinlan said.