July manufacturing output dips slightly but still growing, reports ISM

July manufacturing output picked up where June left off—a sequential decline and while still growing overall— according to the most recent edition of the Manufacturing Report on Business, which was issued today by the Institute for Supply Management (ISM).

The report’s key metric, the PMI, came in at 52.8) a reading of 50 or higher indicates growth), for a 0.2% decrease compared to June’s 53.0, marking the 26th consecutive month of growth, at a slower rate, and also the 26th consecutive months of overall economic growth.

The July PMI reading is 4.8% below the 12-month average of 57.6, and it represents the lowest reading over the last 12 months and also the lowest going back to June 2020’s 52.4. The high over the last 12-month period is January’s 57.6.

ISM reported that 11 manufacturing sectors reported growth in July, including: Apparel, Leather & Allied Products; Nonmetallic Mineral Products; Petroleum & Coal Products; Printing & Related Support Activities; Computer & Electronic Products; Transportation Equipment; Machinery; Textile Mills; Primary Metals; Plastics & Rubber Products; and Electrical Equipment, Appliances & Components. The seven industries reporting contraction in July compared to June, in the following order are: Wood Products; Furniture & Related Products; Paper Products; Miscellaneous Manufacturing; Fabricated Metal Products; Food, Beverage & Tobacco Products; and Chemical Products. The seven industries reporting contraction, from June to July, included: Wood Products; Furniture & Related Products; Paper Products; Miscellaneous Manufacturing; Fabricated Metal Products; Food, Beverage & Tobacco Products; and Chemical Products.

The report’s key metrics were largely down in July, including:
-New orders, which are commonly referred to as the engine that drives manufacturing, fell 1.2%, to 48.0, contracting, at a faster rate, for the second straight month, following a 24-month stretch of growth, with four sectors reporting growth in July;
-Production, at 53.5, fell 1.4%, growing, at a slower rate, for the 26th consecutive month, with five sectors reporting production growth;
-Employment, at 49.9, headed up 2.6%, contracting, at a slower rate, for the third consecutive month, with eight sectors reporting growth;
-Supplier Deliveries, at 55.2 (a reading above 50 indicates contraction), slowed, at a slower rate, for the 77th consecutive month, with ten sectors reporting slower deliveries;
-Backlog of orders, at 51.3, fell 1.9%, growing, at a slower rate, for the 25th consecutive month, with five sectors reporting growth;
-Inventories, at 57.3, increased 1.3%, growing, at a faster rate, for the 12th consecutive month, with 13 sectors reporting higher inventories, and Customer Inventories, at 39.5, fell 4.3%, falling “too low,” at a slower rate, for the 70th consecutive month; and
-Prices, at 60.0, fell 18.5%, increasing, at a slower rate, for the 26th consecutive month, hitting the 60 mark, for the 23rd consecutive month, and the sequential decline marking the fourth biggest on record, going back to 1948, as well as the steepest going back to a 22.1% decline in June 2010

Comments submitted by the ISM member respondents highlighted various themes, including: inflation and a slowing of incoming orders; high inventories; and material availability issues, among others.
“Material extended lead times still affecting business, and the challenging labor market is a huge factor too. Backlog is healthy; we just cannot deliver to customers due to material issues,” observed a Computer & Electronic Products respondent.

And a transportation respondent stated that the chip shortages remain intact, with the Covid-19 lockdowns in China presenting even worse supply issues.

In an interview, Tim Fiore, Chair of the ISM’s Business Survey Committee, observed that, in looking at new orders, a level below 40 typically serves as an indicator of a recession, with the current level still well above that.

One the demand side, which ISM groups as new orders, customers’ inventories, and backlog of orders, Fiore labeled them as “sluggish,” due to manufacturers over-ordering.

“New export orders [up 1.9% to 52.6] came up a little bit, which is good, and backlog of orders was down nearly 2%, which I would expect; it is still expanding [slightly],” he said. “It is likely to go into contraction as we continue to produce that.”

With customers’ inventories approaching 40, Fiore said that was concerning, with levels “too low,” but not way too low.

“I think what is happening is panelists are not seeing new orders come in at the same rates they are used to and are making the assumption that customers have more inventory than they have had in prior months,” said Fiore. “We will have to see how that works out.”

On the consumption side, for production and employment, Fiore said things look relatively stable, with employment at a 7:1 hire-to-fire ratio, based on feedback from panelists, showing that most companies want to hire, coupled with an ongoing level of difficulty companies are having in hiring. And, for demand, there was a 6:1 ratio, in favor of a positive future outlook, up from 3:1 in June.

“What is happening is the panelists are switching from looking at deliveries and pricing issues in the general headline comments to more about the future, as the [mainstream] media continues to talk about how a recession is here,” he said. “The panelists are commenting about demand in the future more and more. It is no longer so much a delivery issue or a price issue. The story is growing around the input side. I think we can kind of clearly say that the supplier community is catching up to what the panelists companies need. We have not seen transport lead times come down yet, but I expect them to drop in the next month or two. Supply chain issues are better than they were in June, and prices are better.”

As for the possibility of manufacturing being in a recession, following second quarter U.S. GDP down for the second straight quarter, Fiore said that is not the case.
“At some point, you are going to land softly, and depending on how you measure a recession, we won’t go into one,” he said. “Everything here is indicating strong future demand. The problem is still labor. Prices are coming down, which will allow the new order level to un-release again, as lead times come down, and suppliers are also delivering better.”

The biggest concern the manufacturing is currently seeing, according to Fiore, is getting stuck with inventory, with a large amount of inventory that was on the books is now off the books, due to over-ordering. And with inventory softening, he said it could lead to a contracting production number, at some point in the future, with manufacturers managing their order streams and being very mindful about what they receive.

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