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ISM: Manufacturing Growth Remains Slow, Steady

Aug. 3, 2015
The PMI drops 0.8 points from June to July and checks in slightly lower than anticipated at 52.7 in the new ISM report, though new orders jumped to their highest mark this calendar year.

Manufacturing activity expanded for the 31st straight month, according to the new national report published today by the Institute for Supply Management, though the pace of that expansion slowed and failed to meet estimates.

The PMI registered at 52.7 for July, down from 53.5 for June and lower than the anticipated 53.5. It has averaged 53.0 during the last three months, as noted by NAM chief economist Chad Moutray, up from an average of 52.0 the three months prior, but down from 56.9 from the fourth quarter of 2014. The 12-month average is 54.4.

TD Economics senior economist Michael Dolega called the report “a bit of a disappointment, especially in light of the weakness in the employment index.” Still, the index has been lower than 52.7 about half the time during the last 25 years, according to MAPI Foundation chief economist Daniel J. Meckstroth, implying the industry’s production is about average right now.

“The good news in the report is that orders improved from an already high level and production rose to a moderately strong level,” Meckstroth said, referencing new orders, which increased to 56.5, the highest mark since December and up from 56.0 last month. “Inventory cutting is obvious in the report. This is an expected reaction to a buildup during the weak first half of the year.”

The PMI hit 59.0 in August and October 2014, before plummeting from 58.7 in November to 51.5 in March and April earlier this year.

The employment index dropped to 52.7 from 55.5, imports slumped to their lowest reading this calendar year at 52.0, and the prices paid index dipped deep to 44.0 from 49.5, missing widely its forecast of 49.0. The last of those three numbers might not be as troubling as it appears, Dolega said, because “it appears once again to be related more to supply factors, including rising global oil production, than demand dynamics.”

“A major downside to the report is that the manufacturing trade deficit continues to worsen,” Meckstroth said. “Imports are growing and exports are declining. The increase in the value of the dollar and the strong U.S. growth relative to other advanced economies are both unbalancing trade.” Foreign trade, Meckstroth said, will drag on manufacturing activity and the economy in general during the rest of 2015 and into 2016.

“The report suggests that manufacturing production is not going to roar back following a relatively flat first half of the year,” Meckstroth said. “We believe manufacturing activity is picking up to a moderate rate of growth in the third and fourth quarters, and will post a growth rate of about 2.5% for the year. The pace of production activity should accelerate in 2016 if we have a normal winter."

“Overall," Moutray said, “manufacturers continue to report growth in the sector, but at a slower pace than we would like to see."

The Labor Department will follow Friday with its monthly employment report. The economy is expected to have added a little more than 200,000 new jobs in July.

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