- Fractional output growth and muted demand hold back overall expansion
- Employment falls for first time since June 2013
- Output expectations moderate to series low
LONDON — U.S. manufacturing firms signaled only a fractional improvement in business conditions in July, with the headline PMI dropping to its lowest since September 2009. Driving less robust overall growth was a slower increase in production and muted client demand. Although the rate of expansion in new business quickened, it remained historically subdued, with export orders contracting for the second time in the last three months. In line with less robust demand, optimism among manufacturers dipped to a series low. Firms were also more cautious towards hiring, with employment falling for the first time since mid-2013.
Meanwhile, firms raised their factory gate charges at an increased rate despite input cost inflation sliding to the lowest for over two years.
The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 50.4 in July, broadly in line with 50.6 in June. The latest reading signaled a fractional improvement in the health of the manufacturing sector, but also indicated the slowest overall expansion since the height of the financial crisis in September 2009.
Manufacturers reported only a marginal rise in production during July, with the rate of growth easing to the slowest since June 2016. The sustained slowdown was linked by panelists to softer demand conditions compared to earlier in 2019, notably for goods supplied as inputs to other companies.
The rate of new business growth remained muted overall, despite picking up to a three-month high. Less robust demand from domestic and foreign clients was attributed to issues in the automotive sector, the ongoing impact of tariffs and hesitancy in placing orders. The decrease in new export business was the second in the last three months.
Muted client demand was reportedly a driving force behind subdued business confidence in July. Output expectations slipped further to a series low (since July 2012) as business conditions are predicted to remain challenging over the coming 12 months, especially for smaller firms.
A reduction in the level of positive sentiment towards the year ahead was also reflected in the first fall in employment since June 2013. A number of firms registered stable workforce numbers during July, with difficulties finding replacement staff weighing on overall workforce numbers. At the same time, backlogs of work were reduced at a modest pace.
On the prices front, firms signaled the slowest rate of input cost inflation for just over two years. Nonetheless, firms continued to increase factory gate charges, with output prices rising at a solid rate that was above the series average despite challenging demand conditions.
Finally, purchasing activity fell for the first time since April 2016 as subdued demand drove further stock depletion. Inventories of inputs and finished goods declined in July.
Commenting on the PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:
“US manufacturing has entered into its sharpest downturn since 2009, suggesting the goods-producing sector is on course to act as a significant drag on the economy in the third quarter. The deterioration in the survey’s output index is indicative of manufacturing production declining at an annualized rate in excess of 3%.
“Falling business spending at home and declining exports are the main drivers of the downturn, with firms also cutting back on input buying as the outlook grows gloomier. US manufacturers’ expectations of output in the year ahead has sunk to its lowest since comparable data were first available in 2012, with worries focused on the detrimental impact of escalating trade wars, fears of slower economic growth and rising geopolitical worries.
“Employment is now also falling for only the second time in almost ten years as factories pull back on hiring amid the growing uncertainty.
“More positively, new order inflows picked up for a second successive month. Although remaining worryingly subdued compared to the strong growth seen earlier in the year, the modest improvement will fuel hope that production growth could tick higher in August.”Tagged with economy, manufacturing