ISM: Manufacturing Economic Activity Grows in July, Employment Contracts, Prices Increase

Economic activity in the manufacturing sector grew in July, with the overall economy notching a third consecutive month of growth, according to the latest Manufacturing Institute for Supply Management Report On Business.

“The July PMI registered 54.2 percent, up 1.6 percentage points from the June reading of 52.6 percent,” Timothy R. Fiore, CPSM, CPM, chair of the ISM manufacturing business survey committee, said. “This figure indicates expansion in the overall economy for the third month in a row after a contraction in April, which ended a period of 131 consecutive months of growth. The new orders index registered 61.5 percent, an increase of 5.1 percentage points from the June reading of 56.4 percent. The production index registered 62.1 percent, up 4.8 percentage points compared to the June reading of 57.3 percent. The backlog of orders index registered 51.8 percent, an increase of 6.5 percentage points compared to the June reading of 45.3 percent. The employment index registered 44.3 percent, an increase of 2.2 percentage points from the June reading of 42.1 percent. The supplier deliveries index registered 55.8 percent, down 1.1 percentage points from the June figure of 56.9 percent.

“The inventories index registered 47 percent, 3.5 percentage points lower than the June reading of 50.5 percent. The prices index registered 53.2 percent, up 1.9 percentage points compared to the June reading of 51.3 percent. The new export orders index registered 50.4 percent, an increase of 2.8 percentage points compared to the June reading of 47.6 percent. The imports index registered 53.1 percent, a 4.3-percentage point increase from the June reading of 48.8 percent.

“In July, manufacturing continued its recovery after the disruption caused by the coronavirus (COVID-19) pandemic. Panel sentiment was generally optimistic (two positive comments for every one cautious comment), continuing a trend from June. Demand expanded, with the (1) new orders index growing at a strong level, supported by the new export orders index re-entering expansion; (2) customers’ inventories index remaining at a level considered a positive for future production, and (3) backlog of orders index returning to expansion for the first time in five months.

“Consumption (measured by the production and employment indexes) contributed positively (a combined seven-percentage point increase) to the PMI calculation, with industries continuing to expand output after May’s return-to-work actions. Inputs — expressed as supplier deliveries, inventories and imports — weakened for the third straight month due to supplier delivery issues abating and import levels re-entering expansion. Inventory levels contracted due to strong production output, supplier delivery difficulties and inventory minimization. Inputs contributed negatively (a combined 4.6-percentage point decrease) to the PMI calculation but were more than offset by the demand and consumption improvement, as was the case in June. (The supplier deliveries and inventories indexes directly factor into the PMI; the imports index does not.) Prices remained in expansion, supporting a positive outlook.

“The growth cycle continues for the second straight month after three prior months of COVID-19 disruptions. Demand and consumption continued to drive expansion growth, with inputs remaining at parity with supply and demand. Among the six biggest industry sectors, food, beverage and tobacco products remains the best-performing industry sector, with chemical products, computer and electronic products, and petroleum and coal products growing respectably. Transportation equipment and fabricated metal products continue to contract but at soft levels.”

Of the 18 manufacturing industries, 13 reported growth in July, including primary metals, electrical equipment, appliances and components, and petroleum and coal products. The three industries reporting contraction in July were transportation equipment, machinery and fabricated metal products.

What Respondents Are Saying

  • “Orders starting to pick up. [An] increase of about 35 percent to 40 percent.” (Chemical Products)
  • “Overall business remains down almost 70 percent. We are hanging on to as many employees as possible, but we will have to lay off 30 percent or more for at least two to three months until September or October.” (Transportation Equipment)
  • “While demand in [the] coming six months is stabilizing, it is at a significant reduction and clear [that] customers have little confidence in the forecasts. Export orders to Brazil, South Africa [and the] Middle East are largely cancelled for balance of 2020.” (Fabricated Metal Products)
  • “Manufacturing outlook has improved greatly in June, as business has resumed at nearly 100 percent. We have implemented a number of safeguards that are costing extra money, but we are running.” (Computer and Electronic Products)
  • “Stabilizing demand for refrigerated and frozen beverage and dessert but still at higher level than a year ago. Uncertainty of school opening in the fall. How much demand will continue or shift will be dictated by students returning to school or not.” (Food, Beverage and Tobacco Products)
  • “Uncertainty regarding our industry and business has not improved. We are developing the 2021 budget around multiple scenarios.” (Petroleum and Coal Products)
  • “Incoming orders are slow. This is usually our busiest time of the year, but production is reduced due to lack of demand. Additional layoffs expected.” (Furniture and Related Products)
  • “General business climate continues to be subdued, driving highly conservative forecasting due to variability in the ongoing pandemic-driven conditions and economic response.” (Machinery)
  • “We are still seeing our customers shut down or affected by COVID-19. We are hoping for a bounce back in September.” (Miscellaneous Manufacturing)
  • “General business conditions are in a general slowing pattern. Many of the plants are on reduced hours and/or furloughs. About 20 percent to 25 percent of plants are scheduled to be consolidated in the next six months to improve margins and profitability.” (Nonmetallic Mineral Products)

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