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US: Manufacturing Activity Continued to Slow in July

  • The ISM manufacturing index edged lower to 51.2 in July from 51.7 in June, undershooting consensus expectations for a small uptick to 52.0.
  • The decline in the headline index was driven by a drop in production (-3.3 to 50.8) and employment (-2.8 to 51.7) subcomponents, reversing gains in the prior month. The backlog of orders index also declined further into negative territory, falling to 43.1 from 47.4.
  • Meanwhile, new orders posted a small uptick (+0.8 to 50.8), as did inventories (+0.4 to 49.5) and supplier deliveries (+2.6 to 53.3) .
  • Trade indexes broadly deteriorated in July, with both export and import indicators falling into contractionary territory. Export orders fell a touch to 48.1 (from 50.5), and import orders declined to 47.0 (from 50.0).
  • Prices paid fell to 45.1 (from 47.9), its lowest reading since March 2016. This is consistent with falling prices in steel and aluminum components after tariffs were imposed in March of 2018.

Key Implications

  • Sometimes the trend is not your friend. The manufacturing slowdown continued in July, with the ISM index falling for the fourth consecutive month. While four of the index’s ten subcomponents remain in expansionary territory, production and new orders (both at 50.8) have only a small cushion that separates them from contraction. Of the 18 manufacturing industries surveyed, only half reported growth in July.
  • A global growth slowdown and trade uncertainty appear to have been responsible for the bulk of the manufacturing slowdown. The U.S. and China have restarted talks this week but no real progress has been made, with the next round of discussions expected to be held in September. Beijing appears to be willing taking a slow approach in hope to extract better terms. This will prolong the uncertainty and run the risk of the U.S. administration imposing further tariffs on imports from China.
  • Yesterday the Fed cut the policy rate by 25 basis points to shore up domestic economy from external headwinds. As we discuss in our recent paper, yesterday’s cut may modestly help manufacturing sector by improving global financial conditions, limiting dollar strength and supporting domestic demand. As long as the latter remains resilient, it should put a floor on U.S. manufacturing activity.
TD Bank Financial Group
TD Bank Financial Grouphttp://www.td.com/economics/
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

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