–ISM’s Fiore: Employment Reduction ‘Positive’ as It Cools Wage Inflation
–Fiore: US Economy More ‘Agile’ while Europe Built to Change Slowly
–Fiore: Domestic Demand Slowly Coming Back, Key Index Unlikely to Fall Below 46
By Max Sato
(MaceNews) – U.S. manufacturing activity was in contraction territory for the ninth straight month in July as companies sought to balance output levels and reduce payrolls through a combination of layoffs, hiring freezes and attrition amid soft demand and uncertainty over the timing of recovery, data from the Institute for Supply Management released Tuesday showed.
The labor market remains tight in the U.S. economy but the ISM index on employment at manufacturing firms fell for the second straight month to the lowest level in three years, indicating moderation going into Friday’s jobs data.
The sector index compiled by the ISM, which shows general direction, rose 0.4 percentage point to 46.4 in July, led by slight upticks in contracting new orders and production, after dipping 0.9 point to 46.0 in June. Previously, it edged down 0.2 point to 46.9 in May, rose 0.8 point to 47.1 in April, fell 1.4 points to 46.3 in March and rose 0.3 point to 47.7 in February. The latest figure is just below the median economist forecast of 46.5.
Regarding the overall economy, the latest figure indicates an eighth month of contraction after a 30-month period of expansion. The ISM’s manufacturing PMI reading above 48.7, over time, generally indicates an expansion of the overall economy.
“Demand remains weak but marginally better compared to June, production slowed due to lack of work, and suppliers continue to have capacity,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement. “There are signs of more employment reduction actions in the near term to better match production output.”
Lower Employment ‘Positive’ for Cooling Wage Inflation
Fiore told reporters that employment reduction is “positive” as it cools wage inflation, adding that deeper job cuts and a more moderate production adjustment are a good combination for the sector.
The method used by manufacturing firms to reduce their workforces in July is more balanced than in June, when the share of layoffs rose substantially compared to those of attrition and freezes, he said.
“The reports on cooling inflation and consumer confidence are driving expectations of a very strong back half (of the year),” a firm in the food, beverage and tobacco products category told the ISM survey.
A transportation equipment maker said, “Demand is softening. Some pricing starting to decrease. Back orders mostly resolved.”
The outlook remains uncertain. “Sales in our industry are extremely slow entering into the second half of the year, and no upturn is expected until at least the fourth quarter,” a chemical producer said.
“Current U.S. market conditions of inflationary and recessionary tactics affecting overall business,” a firm in the computer and electronic products industry said. “Customers are reducing or not placing orders as forecast, (putting) internal focus on reducing financial liabilities and overhead costs.”
US Firms Not Counting on Europe or China for Pickup in New Orders
Fiore said the U.S. economy is more “agile” while Europe is built to change slowly, thus that U.S. firms are not counting on Europe or China to help lift new orders at home in the near term.
“Domestic demand is slowly coming back here,” Fiore said, adding that some firms are having difficulty in securing parts and other supplies.
“We don’t know if we have hit the bottom,” he said. Fiore does not see a spike in new demand but expects a slow recovery.
There are no indications that the main ISM index will go below 46 after fluctuating in the 46s and 47s in the past seven months, Fiore projected. “I see a lot of opportunities for it to break the 50 number,” he said.
In the face of widespread weakness, the ISM last month stopped providing the near-term outlook for the main index, which had been a cautiously optimistic range of 47 to 51.
The index has been on a gradual downtrend since June 2022. It remains 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 all-time low is 29.4 hit in May 1980.
Among the five subindexes that directly factor into the manufacturing PMI, the new orders Index contracted for the 11th consecutive month, staying below the neutral line of 50. It rose 1.7 percentage points to 47.3 in July after rising 3.0 points to 45.6 in June, plunging 3.1 points to a four-month low of 42.6 in May, edging up 0.8 point to 45.7 in April and falling 2.7 points to 44.3 in March.
The production index reading of 48.3 in July is a 1.6-percentage point increase from a three-year low of 46.7 in June, when it fell 4.4 points from 51.1 in May.
The employment index was in contraction for the second straight month, slipping to a three-year low of 44.4 in July, down 3.7 points from 48.1 in June, when it dipped 3.3 points. Previously, the index rose 1.2 points to 51.4 in May after popping into expansion territory for the first time in four months in April at 50.2.
An employment index above 50.4, over time, is generally consistent with an increase in the Bureau of Labor Statistics data on manufacturing employment.
The delivery performance of suppliers to manufacturing organizations was faster for the 10th straight month amid improving supply chains. The supplier deliveries index at 46.1 is 0.4 point higher than 45.7 in June, when it rose 2.2 points from 43.5 in May. The May figure of 43.5 was the lowest since 43.2 in March 2009.
Among other subindexes, the customers’ inventories index rose 2.5 points to 48.7 in July but remained “too low” after plunging 5.2 points to a “too low” level of 46.2 in June (an eight-month low) from a “too High” level of 51.4 in May. The May figure was the highest in more than six years since September 2016, when it registered 52.5. The all-time high is 56.0 hit in January 2001.
“The customers’ inventories index reading indicated appropriate buyer/supplier tension, which is neutral to slightly positive for future production,” Fiore said.
The prices index indicated decreases for the third consecutive month. It rose 0.8 point to 42.6 in July but stayed below the key 50 level after falling 2.4 points to a six-month low of 41.8 in June and slumping 9.0 points to 44.2 in May.
The backlog orders index rose 4.1 points to 42.8 in July. It followed a 1.2-point gain to 38.7 in June and a 5.6-point drop to 37.5 in May, which was the lowest since the Great Recession (33.6 in February 2009).
The new export orders index was in contraction for the second month in a row, falling 1.1 points to 46.2 in July after slipping 2.7 points to 47.3 in June and edging up 0.2 point to the neutral level of 50.0 in May, which was preceded by nine straight months in contraction territory and 25 months of expansion from July 2020 to July 2022.
“Comments continue to note the weak performance in order levels from China and Europe as an ongoing concern,” Fiore said.
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.