Activity in the beleaguered US manufacturing sector contracted a ninth month in July, according to marquee figures released on Tuesday.
The lackluster reading was expected. The range of estimates from the five-dozen economists who ventured a guess on the ISM headline was 45.5 to 48.5. The actual print, 46.4, was thus in line with consensus.
July’s reading, bad as it was, actually counted as a marginal improvement from June.
Meanwhile, the final read on S&P Global’s gauge was 49, unchanged from the flash print. It was the fourth straight month during which both factory PMIs registered in contraction territory.
“Manufacturing continues to act as a drag on the US economy [with] the recent malaise persisting at the start of the third quarter,” S&P Global’s chief business economist Chris Williamson remarked. Still, he noted, “producers are shrugging off recession fears and planning for better times ahead.”
Although the share of manufacturing GDP that showed a contraction last month rose to 92%, according to ISM, Tim Fiore pointed out that the proportion of factory output registering a PMI below 45 (so, a deep contraction) was just 25% in July, down sharply from nearly half the prior month. Fiore called that “a clear positive.”
New orders rose in the ISM survey, as did production and backlogs. The employment gauge, however, dropped pretty sharply. 44.4 was the lowest in three years.
America’s factories are apparently trimming jobs in order to protect margins.
As usual, it was difficult to reconcile some of the color from the two surveys. S&P Global flagged “a sharp fall” in backlogs and a drop in new orders, but said companies “expanded employment at a faster rate amid greater confidence.”
ISM’s prices paid index ticked up, and S&P Global likewise took note of higher input costs. Commodities rose sharply in July. The BCOM is 11% higher over two months. That’s a risk to the disinflation trend in the US.
Still, lackluster demand and contraction-territory PMIs don’t exactly scream “hot goods inflation.” “The combination of weak demand and improved supply led to a further ‘buyers’ market’ for many goods,” S&P Global’s Williamson went on.
All in all, I’m not sure there was a lot to glean from the factory surveys. Demand is still weak, the goods-to-services switching dynamic hasn’t exhausted itself just yet and although goods probably won’t be a disinflationary tailwind going forward, they’re unlikely to be a material contributor to upside inflation surprises either, unless of course the crude rally were to extend.
