United States: ISM manufacturing index skids to near three-year low in July
August 1, 2019
The Institute for Supply Management (ISM) manufacturing index fell to 51.2 in July from 51.7 in June, the lowest reading since August 2016, when the index was last in contractionary territory. The reading missed market expectations of 51.9, but nevertheless remained above the 50-point threshold that separates expansion from contraction in the sector, where it has been for 35 consecutive months.
The weaker expansion in July was largely driven by feeble production, which slowed notably. New orders rose marginally in July, after recording flat growth in June. New business was solely propped up by domestic demand as new export orders contracted in the month, with weaker trade with China and tariff frictions likely to have led the decline. Subsequently, sluggish demand and output caused job creation to moderate notably, as respondents grew more reluctant to replace employees on their way out. Despite weaker hiring, stagnant demand allowed companies to clear backlogs of work at a quicker pace than in June.
On the supply side, imports returned to contractionary territory after momentarily stabilizing in June; supplier delivery times increased at a faster pace in July; and inventories of inputs contracted again in July, suggesting firms are scaling back purchasing activity amid softer demand in order to control costs. Weaker input demand likely contributed to the sharp fall in raw material prices, particularly for metals and computer and electronic products. Lastly, customers’ inventories continued to contract, albeit at a weaker rate than in the prior month.
Commenting on this month’s reading, Ksenia Bushmeneva, economist at TD Economics, noted:
“A global growth slowdown and trade uncertainty appear to have been responsible for the bulk of the manufacturing slowdown. The U.S. and China have restarted talks this week but no real progress has been made, with the next round of discussions expected to be held in September. Beijing appears to be willing to take a slow approach in hope to extract better terms. This will prolong the uncertainty and run the risk of the U.S. administration imposing further tariffs on imports from China.”
Author: Lindsey Ice, Economist