– August 1, 2018

The Manufacturing Purchasing Managers Index from the Institute for Supply Management registered a 58.1 percent reading in July, down from 60.2 in June. Despite the pullback, the index remains well above neutral and is a positive sign for the manufacturing sector. July is the 23rd month in a row above the neutral 50 level and the 111th above the 43.2 percent threshold consistent with expansion in the overall economy. The PMI has been in the 57–61 range for the past 12 months, pushing the 12-month average to 59.1, the highest since December 2004.

Of the 10 components, 8 had declines in July. Among the key components of the PMI, the New Orders Index came in at 60.2 percent, down from 63.5 in June. July was the 31st consecutive month with readings above 50. A New Orders Index reading above 60 is strong by historical measures, and July marks the 15th month in a row, and the 18th month in the past 19, that the index has been at 60 or above. Since 1985, the New Orders Index has led the growth in manufacturing output by about five months. The strong results of the New Orders Index suggest that growth in manufacturing output is likely to accelerate in coming months (see chart). Furthermore, new export orders came in at 55.3, down 1 percentage point, while backlogs of orders fell 5.4 percentage points to 54.7 in July from 60.1 in June.

The production index was at 58.5 percent in July, down from 62.3 in June. July marks the 23rd month in a row above 50. Historically, readings above 51.5 are consistent with growth in the industrial-production index from the Fed. In July, 15 of the 16 industries surveyed reported growth while just 1 reported a decrease in production.

The employment index rose to 56.5 percent in July, up from 56.0 in June. The slightly higher reading suggests employment in manufacturing likely increased in July. The Bureau of Labor Statistics’ Employment Situation report for July is due out on Friday, August 3. Consensus expectations are for 190,000 new nonfarm payroll jobs including 22,000 new jobs in manufacturing. Payroll processor ADP’s estimate for private sector jobs came in at 219,000. Combined, all indications are that the July jobs report is likely to be positive, suggesting continued strength in the labor market.

Supplier deliveries, a measure of delivery times from suppliers to manufacturers, came in at 62.1, down from 68.2 in June. It suggests suppliers are still falling farther behind in delivering supplies to manufacturers but that the pace of slowing is decelerating.

Customer inventories in July are considered still too low, with the index falling to 39.4 from 39.7 in the prior month. Among manufacturers’ customers, only three industries reported excessive inventories: apparel, leather, and related products; wood products; and furniture and related products. The remaining 11 industries reported customer inventories as too low.

The one component that has been raising some concern is the price index. The price index fell 3.6 percentage points to 73.2 in July from 76.8 in June. However, the index has been trending higher for the past two years, and has been above 50 for 29 months and above 60 for 13 consecutive months. These results suggest manufacturers are experiencing materials-costs pressures.

Today’s report from the ISM suggests the manufacturing sector continued to grow in July. Strong readings for new orders, production, and backlogs are particularly favorable, suggesting a positive outlook for manufacturing. Those results are in line with other recent data that point to ongoing expansion for the overall economy.

Robert Hughes


Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.

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