U.S. Manufacturing Activity Loses Steam in July; Prices Fall to 2-Year Low

U.S. manufacturing activity continued to expand at its slowest rate in two years, according to the Institute for Supply Management’s June survey of supply chain executives.

The ISM reports its index of manufacturing activity fell 0.2% in July to a reading of 52.8%, marking the sector’s lowest reading since June 2020, when the economy was just beginning to recover from pandemic lows. Notably, as any reading over 50 indicates expansion, the sector is still growing, hitting its 26th straight month of growth.

July’s activity reading was dragged down by weakening demand, with the ISM’s New Orders Index hitting its second straight month of contraction. The New Orders Index fell 5.9% in June and declined another 1.2% in July.

Employment improved slightly, advancing 2.6%, but the metric remains in contraction at a reading of 49.9%.

Production also declined over the month, down 1.4%, but is still expanding, settling at a rate of 53.5%. Meanwhile, raw materials inventories grew and both exports and imports are growing.

The ISM’s July report suggested the sector may be facing relief from the inflationary pressures plaguing manufacturers for several months. The ISM’s prices paid index fell precipitously in July, down 18.5% to 60%, which is the sector’s lowest rate since June 2020.

Timothy Fiore, the Chairman of the ISM notes that the U.S. manufacturing sector “continues expanding—though slightly less so in July—as new order rates contract, supplier deliveries improve, and prices soften to acceptable levels.”

Fiore noted that despite the easing of prices, “Instability in global energy markets continues.” Despite the contraction in the Employment Index, Fiore noted that companies reported hiring at a strong rate, although there were higher number of quits.

Aluminum, adhesives and paint, electronic components, and solvents remain on the list of commodities up in price. Copper, lumber, plastic resins, and hot-rolled steel are among the few products that have come down in price.

Manufacturers were twice as optimistic in July compared to June. The ISM tracked six positive comments for every one negative comment provided by industrial executives. This is up from the three positive comments for every one negative comment registered in June.

In June, eleven of eighteen industries reported growth, strongest in apparel, leather & allied products; nonmetallic mineral products; petroleum & coal products; and printing & related support activities.

What Manufacturers Are Saying About Business Conditions

Comments from manufacturers revealed a slowing demand environment and ongoing concerns about supplier deliveries and materials shortages, while many are keeping a wary eye on the economy. Said Fiore, “Panelists are now expressing concern about a softening in the economy, as new order rates contracted for the second month amid developing anxiety about excess inventory in the supply chain.”

One executive in the in the chemical products products industry said, “Inflation is slowing down business. Overstock of raw materials due to prior supply chain issues and slowing orders.” 

Another in the plastics and rubber products industry noted, “Current order books are full, but there have been signs of a slowdown beginning in the fourth quarter.”

“New order entry has slowed down slightly;” said an executive in the machinery sector. “However, logistical issues have yet to improve. Long lead times for materials and labor shortages are still a major problem.”

Another in the textile mills sector noted ““Continuing delivery and staffing issues have eaten away the bottom line.”

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