U.S. manufacturing sector activity continued to slow in July to its lowest level in two years as demand and prices cooled off, the Institute of Supply Management reported on Monday.
The manufacturing purchasing managers’ index inched down to 52.8 from 53 the previous month, still indicating growth as readings above 48.7 generally show business expansion.
The slowdown was driven by a contraction in the level of new orders, which are proxy for future demand, down from 49.2 in June to 48 in July. With the pullback in demand, inventories continued to improve, up to 57.3 from 56 previously.
We expect the slowdown to move toward a contraction in the coming months as our RSM US Manufacturing Outlook Index continues to flash signs of a tightening manufacturing sector.
Another main factor in July’s dip was the sharp decline in prices paid for manufacturing products, which alleviates some inflation concerns. The subindex dropped to 60 from 78.5 in the prior month. This was likely due to softer demand and excess inventories, which were two of the most important reasons for economic contraction in the past two quarters.
The level of manufacturing employment was in contractionary territory for the third month in a row, although the pace of contracting slowed in July. This could be a sign that hiring freezes and layoffs, a result of aggressive rate hikes and an economic slowdown, may have spread to the manufacturing sector.
The impact of such rate hikes, however, might take more time to go through the entire sector. Many respondents to ISM’s survey acknowledged in their answers that while their businesses and demand were holding up, they did expect a slowdown coming. “Current order books are full, but there have been signs of a slowdown beginning in the fourth quarter,” a respondent in the plastics and rubber products industry said.