The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index fell to 59.5 in July, down 1.1 points from 60.6 percent in June. July is the 14th consecutive reading above the neutral 50 threshold but breaks a run of five consecutive months above 60 (see top of first chart). Over the past 12 months, the Purchasing Managers’ Index has averaged 59.5, the highest since October 2004. The survey results suggest that the manufacturing sector continues to expand at a robust pace.
Among the key components of the survey, the New Orders Index came in at 64.9 percent, down 1.1 percentage point from 66.0 percent in June (see top of first chart). The New Orders Index has been above 50 for 14 consecutive months and above 60 for 13 consecutive months. The 12-month average is 65.3, the highest since August 2004. The new export orders index, a separate measure from new orders, fell to 55.7 versus 56.2 in June. The new export orders index has been above 50 for 13 consecutive months.
The Production Index registered a 58.4 percent result in July, a drop of 2.4 points from 60.8 percent in June. The index has been above 50 for 14 months. (See top of first chart). The 12-month average is 62.2, down slightly from 62.4 last month but remained above 60 for the third consecutive month. The last time the 12-month average was above 60 was November 2018 through January 2019.
The Employment Index increased in July, adding 3.0 percentage points to 52.9 percent. The employment index had been one of the weaker components during the recovery from government-imposed lockdowns but has been above 50 for seven of the last eight months (see bottom of first chart). Still, the 12-month average is 51.9, well below the 12-month average of the other demand-related indexes. Many of the respondents in the survey noted labor difficulties with worker absenteeism, and difficulty attracting and retaining workers. The Bureau of Labor Statistics’ Employment Situation report for July is due out on Friday, August 6th. Consensus expectations are for a strong gain of 880,000 nonfarm payroll jobs including the addition of 28,000 jobs in manufacturing. The unemployment rate is expected to fall to 5.7 percent.
The Backlog-of-Orders Index increased slightly in July, coming in at 65.0 versus 64.5 in June. This measure is 5.6 points below the record-high 70.6 result in May (see second chart). The index suggests manufacturer’s backlogs continue to rise rapidly but at a somewhat slower pace compared to May.
Customer inventories in July are still considered too low, with the index coming in at a record-low 25.0 percent versus 30.8 percent in the prior month (index results below 50 indicate customers’ inventories are too low; see second chart). The index has been below 50 for 58 consecutive months. Insufficient inventory may be a positive sign for future production.
The index for the net percentage of manufacturers saying that prices for input materials are increasing fell in July but remained at a very high 85.7 percent versus 92.1 percent in June. Rising input costs reflect shortages of materials, labor and production issues, and logistical and delivery problems. Comments from survey respondents suggest that many businesses are passing along price increases to customers.
Supplier deliveries slowed again in July though the pace slowing was less than in June as the index declined to 72.5 from 75.1. The Supplier Deliveries Index has been driven higher by difficulties hiring new workers, longer delivery times for raw materials, higher prices for inputs, product shortages, and logistical challenges relating to transportation.
Overall, demand for the manufacturing sector remains robust but labor difficulties and logistical problems have restrained the ability to meet that demand. It may take some time for supply to catch up with demand, but the period of increased price pressure is unlikely to result in a 1970s-style inflationary spiral.