ISM July manufacturing report is down from June but still showing growth

A slowdown in manufacturing growth appears to be intact based on the most recent edition of the Institute for Supply Management’s Manufacturing (ISM) Report on Business.

In its July report, the ISM reported that the index it uses to measure the manufacturing sector—known as the PMI—was 50.9 percent. This represents a 4.4 percent drop from June’s 55.3, and June was up 1.8 percent from May. Earlier in the year, the PMI was routinely topping 60 but experts said it was not likely it would remain at that level for a long period. From January through April the cumulative PMI average was 61.0 percent for the best combined four-month stretch in this report in more than 20 years.

According to the ISM, any reading 50 or higher is a sign of economic growth. But event with sequential declines in two of the last three months, July marks the 24th consecutive month economic activity in the manufacturing sector has expanded, with the overall economy showing growth for the 26th straight month.

A look at some of the report’s key metrics shows that New Orders were down 2.4 percent at 49.2, and production was off 2.2 percent at 52.3. Employment was down 6.4 percent to 53.5.

“We are still showing growth but at a slower rate,” said Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, in an interview. “July’s PMI, though is its lowest reading of the year and the lowest reading since July 2009, so it certainly has people taking notice.”

Production and Employment, while down from June, are still showing growth at lower rates. But Holcomb said the big story of the July report is New Orders, which he said appears to be in a contracting zone for the first time since June 2009.

Factors contributing to the drop-off in New Orders were a combination of uncertainty over the recently-completed United States increasing its federal debt limit to meet its financial obligations, up and down fuel and oil prices, and consumer anxiety.

The debt situation was reflected in comments from a transportation equipment manufacturer who noted in the ISM report that the looming debt ceiling had government agencies backing away from spending, in turn leading the respondent to forecast a short-term slowdown in short-term demand.

“There are many concerns from manufacturers regarding economic uncertainty about the economy overall and more of a ‘wait and see’ attitude than last month,” said Holcomb. “We could not expect the numbers from earlier in the year to be sustained and are thankful to still be in a growth mode.”

On the pricing side, the ISM Prices’ index has fallen by a cumulative 26.5 percent over the last three months.

Holcomb said this pricing decline bodes well for the next few months, with the relief in pricing something that was heavily discussed and somewhat expected.

“People in certain industries like plastics are saying that orders are being held back, hoping that prices for things like resin go down even further,” he said. “Prices being down are one of the big positives of the report this month.”

Prices being down also have broad-based implications for a number of sectors in the ISM report, due to materials and fuel prices being down, as well as resins impacting packaging materials, which have an impact, said Holcomb. Things could get better with the debt issue being resolved and possibly lead to orders being placed at a quicker rate, coupled with consumer confidence in the economy heading higher.

July Inventories continue to show a pattern of inventory management occurring at an acceptable range, coupled with good inventory management discipline, with manufacturers trying to manage inventory to the right level of order and production activities. Holcomb said that Inventories in the PMI continue to appear in a good operating range.

“Inventories are likely to stay in the 50 percent range,” said Holcomb. “Manufacturers are not on their own going to increase inventories until they start to see orders come in at a quicker rate, which is generally they like to do things—feel confident about orders and have a tendency to increase inventories as to not be caught behind and not be able to fill orders.”