The contraction of the US manufacturing PMI reached its largest in eight months, with employment at its worst since 2009 outside of the pandemic period

On Thursday, August 1st, the data released by ISM showed that the US manufacturing sector in July significantly fell short of expectations, with the largest contraction in eight months, as new orders and output declined, leading to the largest drop in employment in four years.

The US July ISM Manufacturing Index was 46.8, below the expected 48.8 and lower than the June figure of 48.5. The latest data was below the estimates of all economists surveyed by the media. A reading of 50 is considered the dividing line between expansion and contraction.

In March this year, the US ISM Manufacturing Index unexpectedly performed much better than expected, breaking through the 50 mark to reach 50.3, ending 16 consecutive months of contraction in the manufacturing sector. However, looking at the data from the following months, the single-month expansion of the US manufacturing sector was short-lived.

Key sub-indexes in July:

• New Orders Index at 47.4, below the expected 49 and lower than the June figure of 49.3.
• Production Index at 45.9, further declining by 2.6 points in a single month to the lowest point in over four years. Since the end of the first quarter, the output index has cumulatively dropped by 8.7 points.
• Employment Index at 43.4, significantly below the expected 49.2, hitting the lowest level since June 2020, with the June figure at 49.3. According to media reports, excluding the special period of the COVID-19 pandemic, the employment sub-index in July recorded the worst performance since 2009. The further weakening of the production index has put pressure on the employment index.
• Prices Paid Index at 52.9, above the expected 51.8 and higher than the June figure of 52.1. After raw material prices fell to the lowest level of the year in June, they slightly increased in July.
• One bright spot in the ISM data is that manufacturers and their customers are controlling inventory levels. The factory inventory index shows the fastest rate of inventory contraction this year, while the customer inventory index has dropped to the lowest level in four months.

Multiple sub-indexes of the ISM Manufacturing PMI are weak, with analysts pointing out:

The continuous decline in the production index, coupled with a larger contraction in the new orders index, indicates that purchasing managers believe that demand conditions are deteriorating. The ISM survey results sharply contrast with the data from the Federal Reserve, which paints a picture of steady growth in factory output. The latest industrial production report from the Federal Reserve shows a 0.4% growth in manufacturing in June, compared to a 1% growth a month earlier.

The ISM employment report shows the worst data outside of the COVID-19 pandemic period since 2009, with new orders also below expectations, adding to the softness of the data and increasing market bets on rate cuts, as seen in the initial market reaction. However, whether this apparent weakness in the labor market is beneficial for US stocks may be another question, as clearly indicated by the Russell 2000 Index. After the release of the US ISM Manufacturing PMI data, the yield on the US 10-year Treasury bond fell below 4% for the first time since February. Following the data release, there was a significant decline in US stocks, with major indices all turning downward.

Earlier on the same day, the Markit Manufacturing PMI for July in the US was announced, with a final value of 49.6, in line with expectations of 49.6, and an initial value of 49.5.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, stated:

In July, there has been a reversal in the manufacturing recovery trend, with dim growth prospects and a significant cooling of inflation in the goods production sector.

Business conditions deteriorated in July, with new orders declining for the first time since April, leading to almost stagnant production. Due to concerns that sales are below expectations, procurement activities are declining, and hiring is also slowing down.

Many companies expect this weakness to be temporary, related to the pause in spending and investment before the US presidential election. However, expectations for output a year from now remain below historical norms, reflecting additional concerns about the impact of high interest rates and persistent inflation. Orders for factory and machinery investment goods in July saw a significant decline, highlighting the recent drop in capital expenditure, with consumer goods manufacturers also reporting a slight decrease in demand.

There is better news on the inflation front. Input cost inflation, after rising to a 13-month high in May, cooled for the second consecutive month. The easing of cost pressures helps further alleviate the pressure of sales price inflation, with sales price inflation in July slowing significantly to its lowest level in a year, indicating only a slight increase in prices that month. Producer price inflation is almost stagnant, which should lead to a cooling of consumer price inflation in the coming months