ISM data points to solid manufacturing output in July

Even though the numbers showed a mild sequential decline, manufacturing output continues to remain on the right side of growth according to the July edition of the Institute for Supply Management's (ISM) Manufacturing Report on Business, which was issued today.

The report's key metric, the PMI, fell 2.1% to 58.1 (a reading of 50 or higher indicates growth) and has now grown for 23 consecutive months, with the overall economy now having grown for 111 months. July's PMI is now 1% below the 12-month average of 59.1.

ISM reported that 17 of the 18 manufacturing sectors reported growth in July, including: Textile Mills; Electrical Equipment, Appliances & Components; Apparel, Leather & Allied Products; Computer & Electronic Products; Petroleum & Coal Products; Paper Products; Printing & Related Support Activities; Nonmetallic Mineral Products; Machinery; Plastics & Rubber Products; Miscellaneous Manufacturing; Fabricated Metal Products; Food, Beverage & Tobacco Products; Furniture & Related Products; Chemical Products; Wood Products; and Transportation Equipment. The only industry reporting a decrease in July was Primary Metals.

The sequential decline from June to July was evident when looking at the key metrics that make up the PMI.

New orders, which are commonly referred to as the engine that drives manufacturing, fell 3.3% to 60.2 but still grew for the 31st consecutive month and remained above 60 for the 15th consecutive month. Sixteen of 18 manufacturing sectors reported new orders growth in July.

Production dipped 3.8% to 58.5 while still growing for the 23rd consecutive month, and employment was essentially flat, off 0.5% to 56.5. Inventories saw a 2.5% gain to 50.8, while growing for the seventh month straight.

Comments submitted by ISM member respondents for were largely dominated by concerns over the ongoing trade war between the United States and China, with a key focus on tariffs.

“As a result of new tariffs on materials to/from China, we are taking measures to move impacted materials ahead of effective dates, which in some cases is resulting in holding higher inventories,” said a chemical products respondent.

A plastics & rubber products respondent noted that tariffs are resulting in Customs inspection-time increases on imported raw materials from China, adding that logistics seems to be improving, but his company is seeing a continuing tight chemical bulk tanker market.

“If you look at the PMI on its own merit, it is a really strong month,” said ISM Manufacturing Business Survey Committee Chair Tim Fiore. “If you are looking at it coming off of a few months of 60+ PMI a few months back, then it does not look as strong.”

The factors driving the solid July number and led to a slight softening, according to Fiore, were demand (new orders), consumption, and input.

New orders, he said, remains solid and is not viewed as a concern. But he said that a softening in backlog of orders, which were down 5.4% to 54.7 and growing for the 18th consecutive month, is more of a concern. Looking at consumption, customer inventories, which dipped 0.3% to 39.4, are too low, he noted, even though demand is still good.

“The next big month for manufacturing, I think, outside of seasonal adjustment factors, is going to be September,” he said. “October will also be pivotal, too.”

When looking the intersection of input, or supplier deliveries, which slowed at a faster rate to 62.1, and inventories, which rose 2.5% to 53.3, Fiore said it appears it has reached what he called a normalization point.

“We wanted to the supplier delivery number to drop and the raw materials inventory number to grow,” he explained. “That is exactly what it did. There is a bit of a timing issue there, but it should be made up for in the August timeframe. The inventory count also had to respond to a heavy drawdown in June to close the quarter. I am hopeful that the supplier delivery number will remain around where it is, give or take a few points, and the inventory number will jump up to 54 or 54.5 next month.”

Consumption, in the form of production and employment, has been coming in around the same levels of the last three or four months, said Fiore, adding that is not a concern.

“We see a lot of comments from companies saying they are having trouble finding people, and we are in an environment now where have a lot of vacations and don't have new people entering the workforce anymore…so to see stable growth like that is good,” he said.

As for why production was down nearly 4%, he said it represents the first softening in production since April, coupled with July's 58.5 production reading still being a strong number.

Fiore said this number was impacted by the July 4 holiday, which fell in the middle of the week, with many people taking the entire week off and impacted production. What's more, July came on the heels of a very difficult June, which drew inventory down and left suppliers still struggling.

“My guess is a majority of that was around getting those first deliveries of expensive steel delivered that had been ordered back in late March,” he said. “That all came about in June and early July, and I suspect that impacted production, too. But I think we have gotten through that now moving on.”

July prices fell 3.6% to 73.2, with prices now having grown for 29 straight months.

Fiore said this is a reflection of companies now “used to” the high prices of steel and aluminum.

“I think $3,000 a ton for aluminum and $900 a short ton for steel are now the new normal, so when people reported that, they were not up anymore,” he said. “We did have an impact on fuel, too, as well as on transportation, which, I think, has peaked, too, with people used to paying higher freight costs. We went from 3.3% of respondents in June saying prices were lower to 8.1% in July. In this case, out of 100 companies, five more in June said prices dropped, with three more saying that in July. That has to do with the steel impact and freight.”

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