United States: ISM manufacturing index cools in July as capacity stress and trade-related uncertainty start to bite
The U.S. manufacturing sector showed signs of moderating in July, despite remaining on a well above-trend growth path. The Institute for Supply Management (ISM) manufacturing index decreased from June’s 60.2 to 58.1 in July, undershooting analysts’ expectations of 59.5. The index nevertheless remained comfortably above the 50-point threshold that separates expansion from contraction in the U.S. manufacturing sector, where it has been for 22 consecutive months.
The decline in July largely reflected the manufacturing sector cooling from what many analysts saw as unsustainable activity levels. The fall was broad-based, but largely driven by an easing of the capacity strains affecting the sector. Notably, growth in the backlogs of orders slowed markedly, as did input price inflation, while supplier delivery times lengthened at a much slower pace. This was a relatively positive development as it indicates manufacturing firms have been adjusting to the limitations faced in their supply chains. Employment growth also accelerated slightly compared to the previous month in July. However, demand-side factors are also pulling down manufacturing activity growth: New orders and production grew at a significantly lower—albeit still much higher than their long-term average—pace in July. Furthermore, the index for new export orders declined much less than the overall order index, indicating that the loss of demand momentum was in good part caused by domestic factors.
Uncertainty related to the escalation of the trade feud between the U.S. and China was again the number one concern mentioned by most manufacturers in July, and has likely been a factor affecting some components of the ISM Index. Raw materials inventories consequently grew at a faster pace in the month, as explained by one survey respondent:
“As a result of new tariffs on materials to/from China, we are taking measures to move impacted materials ahead of effective dates, which in some cases is resulting in holding higher inventories.”
Overall, momentum in the manufacturing sector remained robust thanks to the strength of the domestic economy, which should continue in the next few months. Nevertheless, firms will need to carefully balance high levels of activity with mounting headwinds, including a deteriorating trade environment, slowing global growth, shortages of available workers, and transportation difficulties caused by an unprecedented shortage of truck drivers in the United States.