Economic News: Manufacturing Activity Contracts for Ninth Month

By Reade Pickert, Bloomberg News (via TNS).

U.S. factory activity contracted in July for a ninth-straight month, reflecting tepid demand for American merchandise at home and abroad.

The Institute for Supply Management’s gauge of factory activity edged up to 46.4 last month, according to data released Tuesday. Readings less than 50 indicate contraction, and the latest figure came in just below expectations.

Measures of new orders and production improved in July, with the former rebounding to a nine-month high. Even so, both remained in contractionary territory. The group’s gauge of exports, meanwhile, fell to its lowest level this year as outbound shipments of U.S. goods continued to decline.

While other parts of the economy remain firm, high interest rates paired with an ongoing rotation in consumer preferences toward services have stifled the manufacturing sector. Sluggish demand abroad has proved to be an additional headwind.

Just two manufacturing industries — petroleum products and furniture — registered overall growth in July. Apparel, plastics and paper led the 16 industries that reported shrinking activity.

The widespread weakness in the sector has forced factories to reduce headcount. The group’s gauge of employment tumbled to 44.4, the lowest reading since July 2020.

“Demand remains weak but marginally better compared to June, production slowed due to lack of work, and suppliers continue to have capacity,” Timothy Fiore, chair of the ISM manufacturing business survey committee, said in a statement. “There are signs of more employment reduction actions in the near term to better match production output.”

The broader labor market, however, remains strong. The government’s monthly jobs report, out Friday, is expected to show U.S. employers added 200,000 jobs last month.

The ISM report showed raw materials prices fell for a third-straight month in July, reflecting normalizing supply chains. Inventories contracted at a slower pace, while supplier deliveries quickened.

The near-term manufacturing outlook remains bleak, but federal investment is poised to bolster the sector in coming years. Legislation championed by the Biden administration, like the infrastructure bill, the Inflation Reduction Act and the CHIPS Act, has already led to a wave of investment in construction and manufacturing, boosting economic growth in the second quarter.

Select ISM industry comments

“Current U.S. market conditions of inflationary and recessionary tactics affecting overall business. Customers are reducing or not placing orders as forecast, (putting) internal focus on reducing financial liabilities and overhead costs.” – Computer & Electronic Products

“Sales in our industry are extremely slow entering into the second half of the year, and no upturn is expected until at least the fourth quarter.” – Chemical Products

“Demand is softening. Some pricing starting to decrease. Back orders mostly resolved.” – Transportation Equipment

“Stable demand for the next four to six months, but longer-term uncertainty. While customer growth is projected, we cannot point to fundamentals that sustain it.” – Fabricated Metals

“Suppliers are starting to reach out looking for new business. Softening is occurring in the China markets.” – Machinery

“June was a strong month, but July has been way off for construction.” – Nonmetallic Minerals Products

“Order book continues to be strong. Working overtime to complete orders. Labor availability is still the number one constraint impacting production. Cannot find qualified salaried or skilled trades people to hire.” – Primary Metals

(With assistance from Kristy Scheuble.)

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