U.S. Factory Pace Nears 2-Year Low

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The pace of U.S. factory activity in July slowed to its lowest level since June 2020 when the sector was recovering from Covid-19-related shutdowns. The Institute for Supply Management’s manufacturing index, the PMI, dipped 0.2 percent from June to 52.8. New orders contracted for the second consecutive month, by 1.2 percent, to 48.0.

Any reading above 50 indicates growth.

Manufacturers are now expressing concern about a softening in the economy as new order rates contracted for the second month amid developing anxiety about excess inventory in the supply chain, said Tim Fiore, chair of the ISM’s manufacturing survey committee. Factory inventories increased by 1.3 percent, from 56 in June to 57.3 in July, suggesting stockpiles are mounting at more manufacturers.  “The big story this month is inventory,” said Fiore. “We haven’t seen that high a level in a long time.”

July’s report was a mixed bag but doesn’t show a precipitous drop-off in demand. Inventory could well be work-in-process (WIP) that’s awaiting a key component before final assembly, said Fiore. Production levels declined slightly but remain above the baseline at 53.5.

“Everybody over-ordered because of long lead times,” Fiore explained. “The first thing you do when you have inventory buildup is pause manufacturing, and that allows factories to catch up. Production remains positive and panelists are still trying to hire workers,” he added.  “I don’t see signals that indicate a lot of softening demand.”

Backlog in computers and electronics remains healthy, a tech executive told the ISM, although materials lead times and the labor market continue to challenge the sector. The tech sector was one of the strongest industries in July, according to the ISM: demand remained high and inventories low. Backlog contracted a bit between June and July.

The transportation equipment sector is still facing a chip shortage, one executive said, but Covid-19 lockdowns in China are causing worse supply issues. Other panelists noted materials lead times remain extended and global logistics have yet to improve.

While employment activity increased 2.6 to 49.9 in July, it remains below the baseline of 50. There were few indications of layoffs, hiring freezes or headcount reduction through attrition but a higher rate of quits, according to the ISM. “There’s still work out there,” said Fiore, “and not enough people to fill jobs. But factories keep hiring – another positive sign for demand.”

“The U.S. manufacturing sector continues expanding — though slightly less so in July — as new order rates continue to contract, supplier deliveries improve and prices soften to acceptable levels,” he added. The ISM’s prices index in July plunged by 18.5 percent to 60 – the fourth largest drop since 1948. Prices of steel, copper, oil and aluminum all declined.

ISM panelists remain optimistic regarding demand, with six positive growth comments for every cautious comment.

“Manufacturing performed well for the 26th straight month,” said Fiore. “There are signs of new order rates softening — cited in 16 percent of general comments, compared to 17 percent in June — as panelists are increasingly concerned about excessive inventories and continuing record-high lead times. Employment activity remained strongly positive in spite of the uncertainty with new order rates.”

Overall, supply chain bottlenecks appear to be easing. Customers’ inventories remained low and backlog eased while still in growth territory. Consumption was mixed during the period. Inputs — supplier deliveries, inventories and imports — continued to constrain production expansion, but to a significantly lesser extent compared to June. New export orders increased by 1.9 percent to 52.6.