Manufacturing Sector Activity in the US Remained Weak in July

Manufacturing activity in the United States remained weak in July, as indicated by the July ISM Manufacturing Index, which recorded a reading of 46.4. Although this was a slight improvement from June’s reading of 46.0, it fell short of the market’s expectation for a stronger reading of 46.9.

The sub-indices within the ISM Manufacturing Index revealed mixed trends. The new orders sub-index increased by 1.7 percentage points to 47.3, showing some improvement in new order levels. However, the new export orders sub-index continued its decline, dropping another 1.1 percentage points to 46.2, indicating a slump in export demand.

A concerning factor is the backlog of orders sub-index, which registered 42.8, up from June’s 38.7. This indicates that backlogs have been falling since October 2022, suggesting ongoing challenges in fulfilling orders and meeting demand.

The production and employment indexes both pointed to contraction, with readings of 48.3 and 44.4, respectively. These figures indicate a slowdown in manufacturing output and a decline in employment within the sector.

On a slightly positive note, the supplier deliveries sub-index rose to 46.1 from 45.7 in June, indicating slight improvements in supplier delivery times. Additionally, the prices paid sub-index rose to 42.6, reflecting softening raw material prices.

However, the overall picture remains grim, as only two out of the 18 manufacturing industries reported growth in July. The Petroleum & Coal Products and Furniture & Related Products industries were the only ones showing signs of expansion. This decline in the number of industries reporting growth compared to June’s four further illustrates the growing pervasiveness of weakness in the manufacturing sector.

The protracted contraction in the manufacturing sector, with all subcomponents showing declining activity, raises concerns about the broader economic outlook. New orders have now been declining for 11 consecutive months, underscoring the challenges facing the manufacturing industry.

For the Federal Reserve, the weakness in manufacturing output may signal that capacity is starting to free up, potentially alleviating some of the price pressures in the economy. Despite a recent uptick in consumer demand for goods in June, inflation continues to soften. This ongoing softening in inflation may influence the Fed’s approach to monetary policy. Many analysts believe that the Fed has likely reached the end of its tightening cycle and may choose to wait for the full impact of previous policy actions to work its way through the economy before making further decisions.

In conclusion, the US manufacturing sector’s weak performance in July, coupled with the declining trend in new orders and limited growth across industries, raises concerns about the overall economic health. The Federal Reserve may carefully monitor these developments and assess the impact on inflation before making any major policy adjustments.