Economic Activity in Manufacturing Sector Contracts Again in July

Economic activity in the manufacturing sector contracted in July for the ninth consecutive month following a 28-month period of growth, according to the latest Manufacturing ISM Report on Business from the Institute for Supply Management.

“The July Manufacturing PMI registered 46.4%, 0.4 percentage point higher than the 46% recorded in June.,” Timothy R. Fiore, CPSM, CPM, chair of the ISM’s manufacturing business survey committee, said. “The New Orders Index remained in contraction territory at 47.3%, 1.7 percentage points higher than the figure of 45.6% recorded in June. The Production Index reading of 48.3% is a 1.6-percentage point increase compared to June’s figure of 46.7%. The Prices Index registered 42.6%, up 0.8 percentage point compared to the June figure of 41.8%. The Backlog of Orders Index registered 42.8%, 4.1 percentage points higher than the June reading of 38.7%. The Employment Index dropped further into contraction, registering 44.4%, down 3.7 percentage points from June’s reading of 48.1%.

“The Supplier Deliveries Index figure of 46.1% is 0.4 percentage point higher than the 45.7% recorded in June. In the last eight months, the Supplier Deliveries Index has recorded its eight lowest readings since March 2009 (43.2%). (Supplier Deliveries is the only ISM Report on Business index that is inversed; a reading of above 50 % indicates slower deliveries, which is typical as the economy improves and customer demand increases.)

“The Inventories Index increased by 2.1 percentage points to 46.1%; the June reading was 44%. The New Export Orders Index reading of 46.2 % is 1.1 percentage points lower than June’s figure of 47.3%. The Imports Index remained in contraction territory, registering 49.6%, 0.3 percentage point higher than the 49.3% reported in June.”

“The U.S. manufacturing sector shrank again, but the uptick in the PMI indicates a marginally slower rate of contraction. The July composite index reading reflects companies continuing to manage outputs down as order softness continues. Demand eased again, with the (1) New Orders Index contracting, though at a slower rate, (2) New Export Orders Index moving deeper into contraction and (3) Backlog of Orders Index improving compared to June but remaining at a low level. The Customers’ Inventories Index reading indicated appropriate buyer/supplier tension, which is neutral to slightly positive for future production. Output/Consumption (measured by the Production and Employment indexes) was negative, with a combined 2.1-percentage point downward impact on the Manufacturing PMI calculation.

“Amid mixed sentiment about when significant growth will return, panelists’ companies reduced production and continued to manage head counts down to a greater extent than in previous months. Inputs — defined as supplier deliveries, inventories, prices and imports — continued to accommodate future demand growth. The Supplier Deliveries Index again indicated faster deliveries, and the Inventories Index remained in contraction territory as panelists’ companies continued to try to mitigate inventories exposure. The Prices Index remained in ‘decreasing’ territory at a level generally not seen since early in the coronavirus pandemic (a reading of 40.8% in May 2020). Manufacturing lead times sentiment improved again but remain at elevated levels. Of the six biggest manufacturing industries, only one — petroleum and coal products — registered growth in July.

“Demand remains weak but marginally better compared to June, production slowed due to lack of work, and suppliers continue to have capacity. There are signs of more employment reduction actions in the near term to better match production output. Ninety-two percent of manufacturing gross domestic product (GDP) contracted in July, up from 71% in June. However, the share of manufacturing GDP registering a composite PMI calculation at or below 45% — a good barometer of overall manufacturing weakness — was 25% in July compared to 44% in June, a clear positive.”

The two manufacturing industries that reported growth in July were petroleum and coal products and furniture and related products. The remaining 16 industries utilized in the ISM’s report reported contraction.

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