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U.S. manufacturing activity continued to sputter in July as production and employment grew at a slower rate according to the Institute for Supply Management’s July survey of manufacturing executives.
Industrial activity now stands at 51.2%, according to the ISM, down 0.5% from June’s reading of 51.7%.
This means that while U.S. manufacturing is still growing, the sector is expanding at a slower rate. Although any reading over 50% indicates expansion, the sector is now close to contraction territory.
Responses from July’s survey suggest manufacturers remain optimistic while concerns over the U.S./China trade war have begun to ease.
Fiore continued: “Respondents expressed less concern about U.S.-China trade turbulence, but trade remains a significant issue. More respondents noted supply chain adjustments as a result of moving manufacturing from China. Overall, sentiment this month is mixed.”
In recent days, more trade tensions have erupted, with the U.S. ordering new tariffs on consumer goods imported from China, and China suspending imports of U.S. agricultural goods in response.
China, this week has also allowed its currency to fall, causing the Treasury Department to label the country a currency manipulator.
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What Manufacturers are Saying:
The ISM’s report included a sampling of responses from manufacturers, with most pointing to strength in the sector.
And while many responses to the ISM’s survey are mostly positive, tariff concerns continue to cast a shadow on an otherwise robust sector, as many businesses grapple with uncertainty and supply disruptions.
Said one respondent in the electrical equipment industry: “General business trends are continuing to show signs of weakness resulting from tariffs and costs impacts of importing and exporting.”
Another in the plastics sector noted: “All aspects of business remain strong, but we’re starting to see the frictional effect of tariffs on exports.”
As the ISM’s Production Index fell in July, one respondent in the chemical sector shed some light on this trend: “Weakness in end markets accelerating rapidly. Continuing to reduce production based on weakened demand and declining current orders.”
Finding skilled workers has been an ongoing issue for manufacturers, which may account for the continued drop in the index.
Says one executive in the furniture & related products industry: “Business is strong mostly due to seasonality. Tariffs surcharges are now being passed through to all customer. Labor is tight, putting pressure on wages costs.”
A slowdown in the transportation equipment sector has also put a damper on optimism, with one respondent in the aircraft sector stating “We are a third-tier supplier to [a major aircraft manufacturer] and it appears its production slowdown of [an aircraft] is having a direct effect on our slowing orders.” Another, in transportation, stated “[Automotive] sales continue to decline, and forecasts have been reduced due to softer predicted demand. Attention to product cost—not sales price—is increasing.
Digging into the ISM Data
It should be noted that July 2019 stands as the 41st consecutive month of growth in the U.S. manufacturing sector, and the 123rd straight month of growth in the economy overall.
Says Tim Fiore, Chairman of the ISM: “Comments from the panel reflect continued expanding business strength, but at soft levels. July was the fourth straight month of slowing PMI expansion.
Demand expansion resumed, with the New Orders Index recording marginal growth, the Customers’ Inventories Index entering “about right” territory, and the Backlog of Orders Index contracting for the third straight month, at stronger levels compared to prior months. New export orders also contracted.”
The ISM reports the New Orders Index, which last month was close to falling below the 50% mark, edged up nearly one percent to a current reading of 50.8.
Meanwhile, production and employment, though still technically in expansion, fell significantly. Imports; exports; order backlogs; and prices all decreased and hover just below the 50% mark.
Just nine of eighteen industries surveyed by the ISM in July reported growth. Leading the way were wood products; printing & related support activities; furniture & related products; food, beverage & tobacco products; and plastics & rubber products.
The nine sectors reporting a contraction in July were apparel; leather & allied products; fabricated metal products; primary metals; nonmetallic mineral products; and transportation equipment.
New Orders Bump Up
The ISM’s New Orders Index sank to a near-contractionary reading of 50% in June, but recovered slightly in July, up a half percent. Says Fiore: “Customer demand expanded slightly in July following one month of no expansion.”
For the past several years, the ISM’s New Orders Index has been well into expansion territory, and generally leading the positive readings in manufacturing activity over the past few years.
The index has remained in expansion territory for 42 consecutive months, meaning it has posted above the 50% mark that defines expansion.
Manufacturing Production Sputters
The ISM’s Production Index declined 3.3% in July to a current level of 50.8%. The Production Index has lagged over the past several months, though did surprise with a 2.8% increase in June.
Lower production readings agree with recent data released by the Federal Reserve in July, which found manufacturing output remains at a virtual standstill.
“Production expansion continued in July, at a weaker pace compared to June. Doe the second straight month, production output was able to improve customer-inventory positions and reduce backlog orders,” said Fiore.
Employment Steps Up
The ISM’s reading on employment suggested a slowdown in hiring, even as the U.S. Labor Department reported manufacturing added 17,000 jobs in June.
The employment index now stands at 51.7%, down 2.8%. July stands as the 34th consecutive month of expanded employment in the U.S., though expansion in this index has slowed significantly.
By comparison, the ISM’s employment index stood at a near-historic high of 60.5% as recently as January 2019.
Conclusion
The ISM’s manufacturing activity index covers a multitude of growth metrics and overall, U.S. manufacturing is still expanding, but at a rate that is near contraction.
New orders have recovered somewhat, while production and employment saw significant slowdowns in growth. to near contraction.
Comments from the panel reflect continued concerns about tariffs, supply disruptions, a tight labor market, and a slowdown in the transportation equipment industry.
About the ISM
The Institute for Supply Management® (ISM®) is the first and largest not-for-profit professional supply management organization worldwide. Founded in 1915, ISM has over 50,000 members located in 100 countries.
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