July ISM manufacturing output heads down but remains at a high level

Even with a modest sequential decline, July manufacturing activity was solid, according to data issued today by the Institute for Supply Management (ISM).

In its monthly Manufacturing Report on Business, ISM said that the report’s key metric, the PMI, came in at 59.5 (a reading of 50 or higher indicates growth), falling 1.1% from June to July. This represented the 14th consecutive month of growth, at a slower rate, coupled with July also representing the 14th consecutive month of growth for the overall economy. The July PMI matched the 12-month average, for the PMI, at 59.5, with March’s 64.7 being the highest and August 2020’s 55.6 being the lowest for that period.

ISM reported that seventeen of the 18 manufacturing sectors tracked by ISM saw gains in July, including:  Furniture & Related Products; Printing & Related Support Activities; Apparel, Leather & Allied Products; Miscellaneous Manufacturing; Computer & Electronic Products; Nonmetallic Mineral Products; Machinery; Fabricated Metal Products; Paper Products; Chemical Products; Food, Beverage & Tobacco Products; Primary Metals; Plastics & Rubber Products; Transportation Equipment; Electrical Equipment, Appliances & Components; Wood Products; and Petroleum & Coal Products. The lone reporting a decrease was Textile Mills.

The report’s key manufacturing metrics were mostly down in July.

New orders, which are commonly referred to as the engine that drives manufacturing, slipped 1.1%, to 64.9, growing, at a slower rate, for the 14th consecutive month, almost on par with a 14-month stretch of expansion, which occurred over the last manufacturing expansion that commenced in 2016. ISM said 15 of 18 manufacturing sectors reported growth in June.

Production—at 58.4 in July—decreased 2.4% compared to June, growing, at a slower rate, for the 14th consecutive month, with 16 of 18 manufacturing sectors reporting growth for the month. And employment—at 52.9—came in 3% higher than June, growing after a June decline, which was preceded by six months of growth.

Other notable deliveries included:

• Supplier deliveries—at 72.5 (a reading above 50 indicates contraction)—slowed, at a slower rate, for the 65th consecutive month, following June’s 75.1, with the delivery performance of suppliers to manufacturing organizations again slower in July;
• Backlog of orders—at 65.0—up 0.5% over June and growing, at a faster rate, for the 13th consecutive month;
• Inventories—at 48.9—down 2.2%, contracting after two months of expansion, and customer inventories—at 25.0—down 5.7% from June, contracting, at a faster rate, for the 58th consecutive month, for its lowest reading on record; and
• Prices down 6.4%, to 85.7, from June’s 85.7, its highest level since July 1979, at 93.1, and the seventh straight month it has topped 80, increasing, at a slower rate, for the 14th consecutive month

Comments from ISM member respondents in the report reflected many on the ongoing manufacturing challenges that have been seen over the last several months, including supply chain issues, labor retention challenges, and rising costs, among others.

“Supply chains are slowly, very slowly filling up. Like a water hose, starting upstream and slowly flowing downstream,” said a chemical products respondent. “Rumor is a full return to ‘normal’ may be nearer to year’s end, but the situation is progressing. Transportation (equipment and drivers) is the current pinch point, more so than material shortages.”

A primary metals respondent noted that business levels continue to be very strong, coupled with an ongoing struggle finding employees, as his company can only fill 75 percent of its order requirements due to the labor shortage.

Tim Fiore, Chair of the ISM’s Manufacturing Business Survey Committee, said in an interview that July served as a transition month, with some signs of labor returning to the manufacturing workforce, as evidenced by how supplier deliveries are starting to get back to a more manageable level.

“You can see, though, that production is still calling for more materials, because the inventory count got drawn down, he explained. “The other positive indication here is that there is again expansion on the employment side, which was helped by the [improving] employment level, as well as the lack of inventory that held production back. I could see production in August easily getting above 60, or maybe even 55, if employment stays at that level, and supplier deliveries maybe dropping to 68…and inventories getting back into expansion. It was really a timing month, where there are so many moving parts happening here that don’t all happen within the same month. It was a really strong month and just a timing issue.”

On the demand side, Fiore said that manufacturing is buoyed by the ongoing strong readings for new orders, noting that the July reading shows that demand is not diminished at all over the last 13 months.

“Demand was really strong, and the new orders number represents that,” he said. “New export order numbers [at 55.7 in July] feeds into that. I would like to see that number get to 58 or 59. In any event, backlog stayed at near record highs, which is very positive, and customer inventories hit a record low. Demand is still extremely strong, and if demand is strong then what is preventing us from expanding production? It is really labor and supplier materials. As long as the government does not extend the enhanced unemployment benefits past September, watch for the transportation numbers to relax a little bit and really free up the entire supply chain and production to get the PMI back to a 65 or 66 level. That would be really good to see. We are back to pre-pandemic levels so if things continue to expand, that is a really good sign.”

What’s more, Fiore said that the manufacturing sector is well-positioned through the first half of 2022, or at least the first quarter, given that the sector was in a recession a year ago.

He said that can be attributed to manufacturing on the right path to resolving towards resolving the labor issue and getting transportation running to some reasonable levels, coupled with backlog to work off and getting empty store shelves and raw materials inventory counts filled.

A good indication of things returning to normal, he said, was the July pricing number, down to 85.7 from 92.1 being the most significant change outside of imports, down to 57.3 from 61.0, with the import numbers due to port-related issues. In June, Fiore said 84% of ISM members reported higher prices, which fell to 73% in July.

“There is definitely a shift going on,” he said. “Early indications and comments were consistent with that, with some comments indicating a bit of an easing in pricing. Lead times are still very long, and there was a bit of a backlog in July, for raw materials. We are still near records. Capex numbers stepped up, too, as did lead times, which is a good thing for the future, because if you invest in capex, you are going to take advantage of that for the next two-to-three years.”

Looking at August, Fiore said it is reasonable to expect similar levels of manufacturing output as July, saying that he does not expect the pandemic to impact domestic manufacturing or factories being shut down.

“There is nothing here that concerns me,” he said. “In fact, I could see where things could be better, as you may see the timing imbalance, which occurred in July, balance out a little bit more in August. We will probably see employment probably come up a little bit and hopefully see the inventory number get back into expansion territory, with the supplier delivery number maybe dropping and offsetting some of that a little bit, and maybe the production number getting above 60.”