US July ISM Manufacturing in Contraction for 4th Straight Month as Soft Demand, Job Cuts Continue, Firms Await Fed Rate Cut

–ISM Manufacturing Index Dips to 46.8 from 48.5 in June, Well Below Median Forecast of 48.8
–ISM’s Fiore: Sector in Temporary Trough, Not Diving into New Slump
–Fiore: Firms Concerned About Supply Chain Disruptions amid Geopolitical Risks
–Fiore: US Election Also Generating Uncertainty Over Future Energy Policy

By Max Sato

(MaceNews) U.S. manufacturing activity was in contraction for a fourth straight month in July on lingering sluggish demand as firms remain reluctant to invest in capacity, amid elevated borrowing costs, and resorting to layoffs to tide over what appears to be a protracted trough, data from the Institute for Supply Management released Thursday showed.

The sector index compiled by the ISM, which shows general direction, plunged 1.7 percentage points to an eight-month low of 46.8, the 20th contraction in the past 21 months, after dipping 0.2 point to 48.5 in June and popping just above the neutral line of 50 at 50.3 in March (the first expansion in 17 months). The latest reading came in far below the median economist forecast of 48.8 and well below the forecast range of 48.0 to 50.1.

Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, told reporters that even if the Federal Reserve lowers its policy interest rate in September, as widely expected, new orders are unlikely to pick up for several months, although a shift to credit easing should help lift sentiment. Fiore said he believes the manufacturing sector is stuck in a temporary trough, instead of diving into a new phase of contraction.

Firms also remain concerned about supply chain disruptions amid heightened geopolitical risks, the ISM survey showed. The uncertainty over the results of the U.S. election in November is also keeping manufacturers uneasy about the future U.S. energy policy as to whether it will seek greener energy sources or rely heavily on oil and gas, Fiore said.

A transportation equipment maker told the ISM that demand continued to soften into the second half of the year. “Supply chain pipelines and inventories remain full, reducing the need for overtime,” the firm said. “Geopolitical issues between China and Taiwan as well as the election in November remain weighing concerns.”

“Even though we are used to a seasonal reduction in business over the summer, consumer behavior is changing more than normal,” a company in the food, beverage and tobacco products category said. “Sales are lighter, and customer orders are coming in under forecasts. It seems consumers are starting to pull back on spending.”

Last month, Fiore said he would stick to his view that the ISM’s main index is in a lower range of 47 to 51, down from 49 to 53 seen earlier this year, amid concerns over an economic slump in the absence of a rate cut by the Federal Reserve.

Among the five subindexes that directly factor into the manufacturing PMI, the new orders index slipped 1.9 points to 47.4 in July after rising 3.9 points to 49.3 in June after slumping 3.7 points to a 12-month low of 45.4 in May (the weakest since 42.9 in May 2023), staying below the neutral line of 50 for the fourth straight month. The index hasn’t indicated consistent growth since a 24-month streak of expansion ended in May 2022. “Panelists’ comments noted a continued level of uncertainty and concern about a lack of new order activity, with confidence in the future economic environment reaching its lowest level since the coronavirus pandemic recovery,” Fiore said.

The production index fell 2.7 points to 45.8 in July, hitting the lowest since 34.2 in May 2020 when world demand plunged at the initial phase of the pandemic. The index slipped back into contraction territory in June, down 1.7 points at 48.5, after three months of showing growth.

The employment index showed a 10th month of contraction in the past 12 months, falling 5.9 points to 43.4 in July (its lowest level since 42.0 in June 2020) after sliding 1.8 points to 49.3 in June after rising 2.5 points to 51.1 in May. “Respondents’ companies are continuing to reduce head counts through layoffs, attrition and hiring freezes,” Fiore noted. “Panelists’ comments in July indicated a notable increase in staff reductions compared to June, supported by the approximately 1-to-1.8 ratio of hiring versus head-count reduction comments.”

The delivery performance of suppliers to manufacturers was “slower” after four months of “faster” deliveries. The supplier deliveries index jumped 2.8 points to 52.6 in July after rising 0.9 point to 49.8 in June. This is the only ISM subindex that is inversed; a reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases. But in this case, Fiore explained that companies are increasingly relying on their suppliers to manage their purchased material inventory, putting more strain on the supply chain.

The manufacturing inventories index contracted for 18 months in a row.

It fell 0.9 point to an eight-month low of 44.5 after slipping 2.5 points to 45.4 in June. “Continuing demand uncertainty is causing panelists’ companies to reduce investment in inventory and remain reliant on suppliers to carry ‘on-demand’ inventory,” Fiore said.

Among other subindexes, the prices paid index indicated growth for the seventh month in a row after showing the first increase in nine months in January. The index rose 0.8 point to 52.9 after falling 4.9 points to a six-month low of 52.1 in June. It surged 5.1 points in April to 60.9, the highest since 78.5 in June 2022. “Commodity prices continue to be volatile, especially oil, natural gas, aluminum and plastic resins,” Fiore said. “Steel prices have reached long-term historical lows, supported by declining scrap prices.” In July, 23% of companies reported higher prices, up from 20% in June

The customers’ inventories index showed contraction for the eighth straight month, moving downward to the upper end of ‘too low’ territory. It fell 1.6% to 45.8 in July after dipping 0.9 point to 47.4 in June and rising 0.5 point to 48.3 in May, the highest since 50.8 in November 2023. The move among customers to trim their inventories is “considered a positive for future new orders and production,” Fiore said. In the previous month, the said it was neutral.

The backlog orders index stayed below 50, and thus in contraction, for 22 months in a row amid sluggish new orders after 27 months of expansion. The index was flat at 41.7 in July after sliding 0.7 point to a seven-month low of 41.7 in June. It slumped 5.6 points to 37.5 in May 2023, which is the lowest since the Great Recession (33.6 in February 2009).

The new export orders index edged up 0.2 point to 49.0 in July after falling 1.8 points to 48.8 in June and rising 1.9 points to 50.6 in May. Earlier, it surged 6.4 points to 51.6 in February for the highest since 52.6 in July 2022. “As was experienced in June, new export orders remain sluggish as international trading partners continue to struggle with weak economies,” Fiore said.

The ISM main index had been on a downtrend since it fell 2.7 points to 53.4 in June 2022 but it seems to have hit a bottom in June 2023 at 46.4, the lowest since May 2020, when the index at 43.5 was recovering from a recent low of 41.8 the previous month during the first wave of the pandemic. The pandemic high was 64.0 recorded in March 2021. The all-time low is 29.4 hit in May 1980.

To assess the overall economic climate, the latest ISM survey indicates the overall economy grew for the 51th straight month after one month of contraction in April 2020. The ISM’s manufacturing PMI reading above 42.5, over time, generally indicates an expansion of the U.S. economy. The July survey showed that 86% of manufacturing gross domestic product contracted, up from 62% in June.

The manufacturing sector is in the sixth contracting phase in the past 20 years. Previously, the ISM manufacturing PMI posted contraction just before the pandemic hit the global economy, from August to December 2019, and from March to May 2020. The deepest slump in the past two decades was recorded from September 2008 until July 2009 (the bottom was 34.5 in December 2008) triggered by the U.S. credit crisis.

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