Economic activity in the manufacturing sector increased at a slower pace in July than in June as some manufacturers reported that inflation was hurting business and had recession fears, according to Supply Management Institute (ISM).
The ISM’s July manufacturing business report, released on Monday (August 1), showed the purchasing managers’ index (PMI) fell 0.2 percentage points to 52.8% in July from 53% in June. A reading above 50% indicates that the manufacturing sector is growing.
According to the report, new orders and employment contracted while output and backlogs increased. Supplier deliveries slowed at a slower rate, raw material inventories rose, and customer inventories were too low. Prices are rising at a slower rate. Exports and imports increased amid record lead times for production materials and consumables for maintenance, repair and operation.
“The U.S. manufacturing sector continues to expand — albeit slightly less in July — as new order levels continue to contract, supplier supplies improve and prices soften to acceptable levels,” said Timothy Fiore, chairman of The ISM Manufacturing Business Research Committee. “According to comments from respondents to the Business Research Committee, companies continue to hire at a strong pace, with little indication of layoffs, hiring freezes or headcount reductions due to attrition. Panelists reported higher exit rates, reversing a positive trend from June. The price expansion eased sharply in July, but volatility in global energy markets remains.
“Sentiment remained bullish on demand, with six positive comments for every cautious comment,” Fiore added. “Panelists are now expressing concern about a softening economy as new order levels contracted for a second month amid growing concern about excess inventory in the supply chain.”
Although the employment index contracted for a third straight month, panelists pointed to a monthly improvement in the ability to hire in July, Fiore said, noting that turnover challenges, including departures and retirements, have prevented companies from reaching adequate staffing levels.
The following manufacturing industries reported moderate to strong growth in July: petroleum and coal products, computer and electronic products, transportation equipment and machinery.
“Manufacturing performed well for 26th straight month,” Fiore said. “There are signs of softening in new order levels – cited in 16% of total comments, compared to 17% in June – as panelists are increasingly concerned about excess inventories and continued record high lead times. Employment activity remains strongly positive despite uncertainty with new order levels.”
In the computer and electronic products industry, a respondent said, “extended lead times are still affecting business, and the challenging labor market is also a huge factor. Lagging is healthy; we just can’t deliver to customers because of material issues.” In the transportation equipment industry, a respondent said that “chip shortages remain; however, the COVID-19 lockdown in China is creating even worse supply problems.”
A machinery industry respondent said new orders had slowed and “logistics issues are yet to improve. Long delivery times for materials and labor shortages are still a major problem.”
Other respondents noted concerns about inflation and an impending recession. A chemical industry respondent said that “inflation is slowing down business. Excess raw material inventories due to past supply chain issues and delayed orders.” A food, beverage and tobacco industry respondent said “rising inflation is forcing a stronger narrative around lingering recession concerns.” Customers are reducing orders to reduce inventory.
In metalwork, one respondent said: “our markets are still holding back; however, I believe there is a delay ahead. We are careful not to go too far with orders. I also believe that the overall market is at the beginning of a recession. And in the plastics and rubber industry, a respondent said “current order books are full, but there are signs of a slowdown beginning in the fourth quarter.”