The Institute for Supply Management index, a closely watched measure of U.S. manufacturing activity, rose 1.6 points to 54.2 in July from 52.6 in the previous month, surpassing market expectations of 53.6. This marks the third consecutive month of expansion and a significant bounce from the 11-year low of 41.5 that we saw in April.
Readings above 50 indicate expansion in manufacturing activity. The index was lifted by sharp increases in orders (61.5 in July, up from 56.4 in June) and production (up 4.8 points), which both grew for the second consecutive month. The long-term labor market still remains a concern, given employment contracted for the 12th consecutive month and the employment index is still below 50 (44.3), which signals that employers were still shedding jobs, albeit at a much slower pace in July.
“The growth cycle continues for the second straight month after three prior months of COVID-19 disruptions,” Timothy R. Fiore, chair of the Institute for Supply Management Manufacturing Business Survey Committee, said in a news release Monday. “Demand and consumption continued to drive expansion growth, with inputs remaining at parity with supply and demand. Among the six biggest industry sectors, food, beverage and tobacco products remains the best-performing industry sector, with chemical products, computer and electronic products and petroleum and coal products growing respectably. Transportation equipment and fabricated metal products continue to contract, but at soft levels.”
The ISM’s manufacturing index is now at its highest level since March 2019, but this does not mean the manufacturing sector has recovered. The ISM’s is a diffusion index and is designed to capture rates of change of activity, not levels of activity, and overall output still remains at depressed levels compared to before the COVID-19 pandemic. The extreme weakness of business capital spending means that we do not expect to see a full recovery in manufacturing for some time.
“General business climate continues to be subdued, driving highly conservative forecasting due to variability in the ongoing pandemic-driven conditions and economic response.” — ISM survey respondent in the machinery sector
Overall, manufacturers have fared better than their counterparts on the service side of the economy, and most companies are now seeing improvements in sales and orders. While the most recent data indicates an overall uptick in business activity, we are significantly below pre-pandemic levels and expect a long road to recovery. We do view this as a once-in-a-generation opportunity for manufacturers to transform their organizations and adopt more agile and flexible manufacturing practices. This will require digital technologies to collect the necessary data to effectively respond to changing supply and demand dynamics in all market scenarios.
