US manufacturing is slowing modestly; Excess stocks are a major concern

  • The manufacturing index fell to 52.8 in July from 53.0 in June
  • Contract new orders, improve supplier deliveries
  • slowing increases in input prices; Accumulation of stocks

WASHINGTON (Reuters) – U.S. manufacturing activity slowed less-than-expected in July, and there were signs that supply constraints were easing, with a measure of prices paid for inputs from factories dropping to a two-year low, suggesting inflation is easing. It has probably peaked. .

While Monday’s Institute for Supply Management survey showed a gauge of hiring factor hiring for the third month in a row, Timothy Fury, chair of the ISM Manufacturing Business Survey Committee, noted that “companies continue to hire at robust rates, with few indications of layoffs, hiring freezes or reducing staffing.” The number of employees is through attrition.”

The better-than-expected ISM reading indicated that the economy was not in a recession despite the drop in GDP in the first half of the year. However, companies are sitting in excess stocks after ordering too many goods due to fears of shortages, which leads to lower new orders.

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“The post-pandemic restocking cycle is declining amid declining consumer demand,” said Pooja Sriram, an economist at Barclays in New York.

“This raises the risks of a more difficult downside in the manufacturing sector later this year. However, the overall PMI will still need to dip a bit to reach readings consistent with an outright recession.”

The ISM’s index of national factory activity fell to 52.8 last month, the lowest reading since June 2020, when the sector was pulling out of the pandemic-induced recession. The PMI was at 53.0 in June. A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the US economy.

Economists polled by Reuters had expected the index to fall to 52.0. A reading above 48.7 over a period of time generally indicates macroeconomic expansion.

Four of the six largest industrial industries — petroleum and coal products as well as computer and electronic products, and transportation equipment and machinery — posted moderate to strong growth last month.

High inflation remained a complaint among businesses even though overall increases in input prices began to slow significantly. Chemical product manufacturers said inflation was “slowing business,” and they also noted “excess stocks of raw materials due to previous supply chain issues and slowing orders.”

Food product manufacturers reported that “many customers appear to be holding back orders in an effort to reduce stocks.” Textile mill operators said that “persistent delivery and staffing issues have hampered the bottom line”.

The forward-looking new orders sub-index in the ISM survey fell to 48.0 from a reading of 49.2 in June. This was the second consecutive monthly contraction. Combined with a steady decline in the backlog of orders, this indicates a further slowdown in manufacturing in the coming months.

Several retailers, including Walmart (WMT.N), report excess inventory because high inflation forces consumers to spend more on low-margin food products rather than clothing and other general merchandise.

Stocks on Wall Street were trading slightly lower. The dollar fell against a basket of currencies. US Treasury rates were mostly higher.

Facilitate supply packages

The ISM gauge of factory inventories rose to a 38-year high in July. According to ISM’s Fiore, companies have been showing the most concern about their inventory levels since the start of the COVID-19 pandemic two years ago when a slowdown in manufacturing activity was expected.

The moderation in manufacturing also reflects a shift in spending on services from goods and the impact of higher interest rates as the Federal Reserve deals with inflation. Last week, the US central bank raised the interest rate by another three-quarters of a percentage point. It has now raised that price by 225 basis points since March. Read more

The economy contracted 1.3% in the first half of the year. Huge fluctuations in inventories and trade deficits linked to faltering global supply chains were largely to blame, though overall momentum waned. Read more

Supply bottlenecks are fading, helping to curb inflation at the factory gate. The ISM measure of supplier delivery fell to 55.2 from 57.3 in June. A reading above 50% indicates slower factory deliveries.

The survey’s measure of prices paid by manufacturers fell to 60.0, the lowest level since August 2020, from 78.5 in June.

“This should satisfy the Fed and provide further evidence that rate hikes will not need to continue until 2023,” said James Knightley, chief international economist at ING in New York.

But the road to low inflation will be long. While the survey’s gauge of factory employment rose to 49.9, it remained in contraction territory for the third month in a row, with manufacturers continuing to express difficulty finding workers.

The high turnover related to resignations and retirement has also frustrated efforts to adequately hire factories. There were 11.3 million job openings across the economy at the end of May, with roughly two job openings for every unemployed worker.

“This report aligns with the Fed’s desire to give the supply side a chance to keep pace with demand, but there is a long way to go as the manufacturing sector appears to continue to suffer from shortages,” said Conrad de Cuadros, chief economic adviser. At Brean Capital in New York.

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(Reporting by Lucia Mutikani) Editing by Chizu Nomiyama and Paul Simao

Our Standards: Thomson Reuters Trust Principles.

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