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US: Manufacturing Activity Decelerates in July

After two consecutive months of increases, the Institute for Supply Management (ISM) manufacturing index pulled back by 2.1 percentage points to a still heady 58.1 in July. This was below market expectations for a smaller decline to 59.4.

The move reflected declines in new orders (-3.3 to 60.2) and production (-3.8 to 58.5). Respondents indicated that demand remained strong but that they faced production difficulties due to labor and material shortages.

Trade-related subcomponents, after a brief reprieve last month, continued to weaken this month. Export orders (-1.0 to 55.3) and imports (-4.3 to 54.7) both declined, reflecting trade-related tensions.

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As an indicator of things to come, the spread between new orders and inventories narrowed significantly from 12.7 to 6.9 in July, suggesting some additional deceleration in activity may be expected.

Of the 18 manufacturing industries reporting, 17 recorded growth in July while primary metal manufacturing reported a decline.

Key Implications

July’s report highlights concerns about capacity constraints, which is becoming an increasingly pressing issue for the American economy. Several industries indicated that labor availability has been a problem, as they struggle to fill positions at all levels of their organizations. This is corroborating evidence that a tight labor market is a constraint on economic growth, in line with an unemployment rate that is close to a record low level.

Manufacturers continue to feel the squeeze of the tit-for-tat tariff measures. Several indicated rising input costs, particularly relating to steel and aluminum. Others noted a reduction in orders from China as well as administrative delays at customs, when importing from China. Concerns about being able to pass these rising costs on to final consumers, has resulted in tightening profit margins for many.

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