U.S. Factory Gauge Sinks to Lowest Since '16 as Exports Drop

(Bloomberg) --

U.S. manufacturing activity deteriorated in July to an almost three-year low, dragged down by slower production and shaky export markets that help explain the Federal Reserve’s decision to reduce interest rates on Wednesday.

The Institute for Supply Management’s index eased to 51.2 last month from 51.7 in June, according to data released Thursday. Figures above 50 signify expansion, and the median estimate in a Bloomberg survey of economists was for a July reading of 52. Measures of output, factory employment and input prices all declined during the month.

Key Insights

• The fourth straight downturn in the overall index of factory activity, inching closer to outright contraction, is consistent with the recent trend of manufacturing weakness throughout the world. Producers are beset by a combination of tepid global economies and trade policies and tariffs that have left supply chains at some companies in disarray.
• While manufacturing makes up only about 11% of the U.S. economy, the risk is that further weakness will extend to service providers and prompt those companies to reduce investment and limit hiring, endangering the record-long expansion.
• Details of the ISM’s report showed a gauge of production declined for the third time in four months, pushing a measure of manufacturing employment to its lowest level since November 2016.
• An index of exports from manufacturers dropped to the lowest level since February 2016.

What Our Economists Say

“While the latest ISM data show the manufacturing expansion significantly weakening, recent reports on industrial production, factory jobs and durable goods suggest domestic conditions in the segment may be less dire. However, global manufacturing -- particularly in the euro area and China -- remains dismal.”
-- Yelena Shulyatyeva and Carl Riccadonna, economists
Click here for the full note.

Official’s View

“In the last report we weren’t really sure about the extra $300 billion on Chinese goods,” Timothy Fiore, chairman of ISM’s manufacturing survey committee, said on a conference call, referring to tariffs on additional imports that President Donald Trump threatened. “We’re kind of back to where we were before the additional $300 billion was threatened. We’re back to the $250 billion. I think the community has kind of accepted that those tariffs are going to remain.”

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• A separate factory index from IHS Markit came in at 50.4 on Thursday. That’s the lowest in almost a decade and just shy of contraction, though an improvement from a preliminary reading of 50.
• The ISM data showed prices paid by factories for materials used in manufacturing contracted in July for a second month, indicating input costs are getting cheaper amid sluggish global demand.
• A gauge of producers’ order backlogs retreated by 4.3 points to 43.1, a sign manufacturers have ample capacity to meet demand.

--With assistance from Kristy Scheuble.

To contact the reporter on this story: Ryan Haar in Washington at rhaar3@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Vince Golle

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