Manufacturing Slows in July

Even with a slight decline from June, the July edition of the Institute for Supply Management's (ISM) Manufacturing Report on Business still showed growth.

The PMI, the ISM's index to measure growth fell 0.8 percent to 52.7 (a PMI of 50 or greater represents growth). PMI growth has been at 50 or higher for 31 straight months (with the overall economy growing for 74 months), and the current PMI is 1.7 percent below the 12-month average of 54.4.

Including the PMI, two of the report's key metrics were up in July. New orders, commonly referred to as the engine driving manufacturing, inched up 0.5 percent to 56.5 for a new 2015 night, showing growth for the 32nd month in a row, and production rose 2.0 percent to 56.0, which was 2 percent ahead of June's 54.0. ISM observed that ten sectors reported new order growth in July, with six reporting declines, and eight sectors reported production growth in July, while five reported decreases.

Employment dipped 2.8 percent to 52.7, while growing for the third month in a row (50.6 is the baseline metric for employment growth).

The ISM said in the report that 11 of the 18 manufacturing sectors reporting into the ISM grew in July, matching June and down from 14 in May.

Comments submitted to the report by ISM member respondents were somewhat mixed. A fabricated metal products respondent cited how the market is in the “summer slow-down,” and a petroleum & coal products respondent said the decline in oil prices continues to negatively impact the oil and gas sector. A miscellaneous manufacturing sector responded commented that business conditions are stable with little change from last month.

“This [PMI reading] is somewhat disappointing,” said Brad Holcomb, chair of the ISM Manufacturing Survey Business Committee. “But new orders are strong, with three of the top four manufacturing sectors reporting growth in July (textile mills, paper products, apparel, leather & allied products). On balance, though, this is a good report.”
Holcomb said the 2 percent gain in production is not entirely positive, as it will run at the available employment rate, as well as asset level. And with this gain in production, new orders (up 0.5 percent to 56.5 in July) have been worked off, as well as dug into backlog of orders (down 4.5 percent to 42.5), too.

“All things being equal, we can see production come down next month,” he said. “I like production at 56.0. but we need to keep it in context. Employment feels like we are at a decent level across the country, so to not be growing as fast as last month is not a shocker, but we are not going to add significant numbers relative to perhaps the non-manufacturing sector, which is, of course, much larger.”

July supplier deliveries were up 0.1 percent to 48.9, and inventories fell 3.5 percent to 49.5. Inventories saw declines in large part to production gains in working off of inventories, while falling below 50 for the first time since April explained Holcomb.

“That is mostly what it is despite the fact that supplier deliveries were faster, and I attribute that to the West Coast port issues being resolved to some degree,” he noted.

Prices saw a 5.5 percent drop to 44.0 in July, reported ISM, with prices falling for the ninth straight month.

Holcomb said this most recent decline is not surprising and is driven by oil, while serving mostly as a positive for manufacturing in that it opens up margins with low input prices and enables manufacturers to hold on to those prices at the finished good end, which is good for business in the short-term.

As for what short-term is, he said that can vary, while the impact needs to be monitored. But in the long-haul, he said, a deflationary economy is not welcome, although the current price decline can be a component of that, although things are not there yet.

Holcomb said manufacturing growth for the first half of 2015 can be viewed as modest, with things still modest, but growing, in the second half.

“The sector needs to be viewed month-by-month as there are a lot of things going on in the world like a low PMI in China, and things in Greece still playing out and slow conditions in Europe,” he said. “But we are still growing and have been for a while in manufacturing.

IHS Global Insight U.S. Economist Michael Murray was tepid in his remarks about the ISM's data.

“The US manufacturing world is not in decline, but is balancing the drag from weak exports and higher imports combined with inventory drag,” he wrote. “US domestic demand growth remains moderately positive, but it not solid enough to offset foreign trade and inventories which are a bit too high. This battle should continue to produce more anemic results until either the trade or inventory drags wane enough to permit demand gains to yield improvement in the industrial world. While the dog days of August have just arrived, they are likely to continue until the fourth quarter unless some unseen spark ignites US demand.”

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