The July ISM Manufacturing Index registered 46.4, a slight improvement over June’s 46.0 reading but short of the firming to 46.9 markets had expected.
The new orders sub-index rose 1.7 percentage points (pp) to 47.3, while new export orders fell another 1.1 pp to 46.2.
The backlog of orders sub-index registered 42.8, up from June’s 38.7 print. The sub-index shows backlogs have been falling since October 2022.
The production and employment indexes both signaled contraction, registering 48.3 and 44.4, respectively.
The supplier deliveries sub-index rose to 46.1 from 45.7 in June – still reflecting improving supplier delivery times. The prices paid sub-index rose to 42.6 but continues to reflect softening raw materials prices.
Two of 18 manufacturing industries reported growth in July. The industries reporting growth are Petroleum & Coal Products and Furniture & Related Products.
Key Implications
The manufacturing sector is showing signs of contraction for the ninth consecutive month with little change in the headline index, and all subcomponents showing declining activity. Moreover, only two of 18 industries reported growth in July, down from four in June. The weakness in the sector is growing more pervasive – as would be expected given that new orders have now declined for 11 consecutive months.
For the Fed, weakness in the manufacturing sectors output should signal the freeing up of capacity and easing price pressures. From this lens, despite last week’s personal consumption expenditure report showing that consumer demand for goods ticked up again in June – led higher by healthy growth in durables expenditures – inflation continues to soften. Looking forward, we are of the view that the Fed has likely reached the end of its tightening cycle and will wait for the full force of policy to work its way through the economy.
