July manufacturing sees sequential dip but still growing

Manufacturing output in July was in line with June, remaining on the right side of growth but still seeing a marginal decline, according to the most recent edition of the Manufacturing Report on Business issued by the Institute for Supply Management (ISM) today.

The report's key metric, the PMI, fell 0.5% to 51.2 (a reading of 50 or higher indicates growth), coming on the heels of 0.4%, 0.7%, and 2.7% declines in June, May, and April, respectively. The index has seen growth for 35 consecutive months, with the over all economy now having grown for 123 consecutive months. The July 2019 PMI is 4.2% below the 12-month average of 55.4, with July's marking the lowest reading during that span and is also the lowest PMI reading going back to October 2016.

ISM reported that nine of 18 manufacturing sectors saw experienced growth in July including: Wood Products; Printing & Related Support Activities; Furniture & Related Products; Food, Beverage & Tobacco Products; Plastics & Rubber Products; Computer & Electronic Products; Textile Mills; Petroleum & Coal Products; and Chemical Products. The nine industries seeing declines included: Apparel, Leather & Allied Products; Fabricated Metal Products; Primary Metals; Nonmetallic Mineral Products; Transportation Equipment; Paper Products; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; and Machinery.

The report's key metrics, including the PMI were mostly down in July.

New orders, which are commonly referred to as the engine that drives manufacturing, eked out a 0.8% gain to 50.8, following an “unchanged” reading in June, following 41 consecutive months of growth. ISM said seven manufacturing sectors saw growth in July, with three of the top six sectors expanding and three contracting.

Production, at 50.8, slipped 3.3%, growing for the 35th consecutive month but coming up short compared to June's 2.8% increase. Eight manufacturing sectors reported growth in July. Employment fell 2.8% to 51.7, growing for the 34th consecutive month. And supplier deliveries, at 53.3 (a reading above 50 indicates contraction) was 2.6% higher than June's 50.7 reading, which is the lowest reading since September 2016's 50.2, marking the 41st consecutive month of slowing supplier deliveries. Inventories rose 0.4% to 49.5, contracting for the second month in a row.

Comments in the report submitted by ISM member respondents expressed concerns over slowing business conditions, coupled with the ongoing theme of trade tension.

An electrical equipment, appliances, and components respondent said that general business trends are continuing to show signs of weakness resulting from tariffs and cost impacts of importing and exporting. And a computer & electronic products respondent noted that China tariffs continue to be a concern, specifically the uncertainty of future tariffs involving China, Canada, and Mexico.

ISM Manufacturing Business Survey Committee Chair Tim Fiore said in an interview that while the PMI has seen declines for four straight months, when digging below the surface, the biggest drop-offs are on the consumption side, in production and employment.

“It is not because they are not able to satisfy demand, it is because the demand is not there,” he said. “The reason for that is backlog of orders [contracting for the third straight month, down 4.3% to 43.1] is contracting at its strongest level in a long time. Production and employment have been able to consume all the new orders, as well as chew heavily into the backlog, to the point where it is contracting around 30% compared to June. At some point, backlog goes away and you have nothing to work on, and then you get layoffs.”

Fiore said this premise is validated by the inventories number slowing, with the expectation that it would be up slightly in July, due to restocking for the third quarter. But he noted this shows better alignment with the demand side, which is very weak.

What's more he observed that imports and exports contracted in July, while customer inventories grew, leaving demand essentially flat, leaving the outlook uncertain for August, while production is positioned well in excess of what is needed, which is a concern.

The biggest issue continuing to hamper manufacturing, at the moment, remains trade, according to Fiore.

“The China PMI contracted again, and the European PMI has contracted for six straight months, with both economies pretty weak,” he said. “About 15% of manufacturing GDP out of the U.S. gets exported, but there is no real demand there, nothing is growing. On top of that, you are faced with counter-tariffs. The biggest issue is that we need to resolve the trade issue. Nobody really feels there is a short-term solution, and on top of that it is being used as a threat more and more often. Using the economy as a threat to meet your political goals is a really dangerous place to be.”

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