The Institute for Supply Management (ISM) today published its Manu- facturing Report on Business, with a disturbing trend only deter- iorating further in July. The manufacturing sector, that group of businesses that led the American economy out of the last recession thanks greatly to overseas demand for goods, moved dangerously close to economic contraction in July.
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ISM published its Manufacturing Index for July this morning, and offered a disappointing result which continued an ugly trend. While the manufacturing sector continued to expand, a point that should be made and is lost through much of the reporting of the popular press, the pace of sector expansion slowed dramatically in July.
Where economists surveyed by Bloomberg were looking for a reading of 54.3 on ISM’s Purchasing Managers Index (PMI), we instead received a measure of 50.9. It was a disturbing decline from June’s healthier mark of 55.3. Keeping in mind that 50.0 marks the break between expansion and contraction, the news rang a loud alarm from Silicon Valley to Detroit to Wall Street.
President Obama has publicly hung his great hope for American economic growth partly on a manufacturing revival. Much of our shared vision is based on manufacturers’ sales into the hot emerging markets of India and China. Yet recent months’ data has only offered a decelerating rate of expansion that is now near stalling. In fact, that seemed to be the broad-bearing message throughout the report. While there was little change in the number of respondents reporting better conditions generally speaking, there were also few reporting worse conditions. However, there was a marked increase in the number of respondents reporting similar conditions to June. What’s important is that there clearly seems to be a slowing in the manufacturing sector that could lead to a downturn in the months ahead.
For many industries, the summer months produce a seasonal lull, and this is especially the case for those doing business with Europe. Respondents qualitative responses seemed to show European weakness and U.S. softness, but growth in demand from Asia continued. In fact, the President’s hopes seemed somewhat supported, as the weakness that took the index lower was mostly due to lighter domestic demand.
We can be certain that the uncertainty caused by Washington DC’s fumbling of the debt ceiling legislation, nearly pushing the nation into default (an issue not yet resolved as I publish), froze business activity within the U.S. in July. Indeed, the New Orders Index slipped short of 50.0, to 49.2, from 51.6 in June. This could play an important role in taking the broader PMI measure under 50 in August. Also, hiring understandably shut down, with the Employment Index falling to 53.5, from 59.9 in June. Neither of these data points offer prospect for third quarter economic expansion, just days after Q1 GDP growth was revised sharply lower, to +0.4% from 1.9%, and Q2 growth was reported only up 1.3% against economist expectations for 1.9%.
The data might have been more poorly received Monday if not for the sigh of relief taken by global markets, thanks to what appears to be an imminent resolution to the U.S. debt uncertainty. However, investors should not overlook the fact that the pace of manufacturing expansion had been decelerating over recent months, even before the clouds of uncertainty gathered over Washington. Unfortunately for many American factory line workers, growth in overseas demand for U.S. goods might not necessarily result in a proportional increase in U.S. based jobs. With the cost of transportation high, tax rates often less favorable, and a hungry workforce at the destination of demand, that overseas growth might just employ more foreigners in the end.
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