The Institute for Supply Management (ISM) said that the manufacturing sector contracted in July for the second straight month. The purchasing managers’ index (PMI) was virtually unchanged, up from 49.7 in June to 49.8 in July. Prior to last month, the PMI had not been below 50 – its threshold for expansion – since July 2009. This shows that manufacturing activity has stalled, with rising uncertainties weighing heavily on the minds of business leaders and consumers.
One of the more troubling elements in this survey is the fact that new orders and new export orders continue to contract, with readings of 48.0 and 46.5 for July. Slower growth around the world is definitely hurting sales. Earlier today, for instance, Markit announced that manufacturing production in the Eurozone continues to decline, with its Eurozone PMI falling to 44.0. All of this is not good news for future production in the United States.
There were some positive signs in the ISM report. Production and employment growth remain in expansion territory, even as the pace of this growth has slowed. The production index, which stood at 61.0 in April, has declined to 51.3 in July and it was 51.0 in June.
Another piece of welcome news is that pricing pressures continue to ease, with the prices paid for inputs index at 39.5. Lower petroleum and other raw material prices have benefited producers. Meanwhile, inventories contracted less sharply for the month.
Interestingly, the sample comments provided by ISM tend to be more upbeat than the numbers might suggest. A primary metals manufacturer said, “Business remains surprisingly strong.” This was echoed by a couple other respondents, including those from the machinery and metals sectors. However, manufacturers remain concerned about economic uncertainty caused by the fiscal cliff and looming defense cuts. A chemical producer noted, “General state of business this month is flat, with increasing economic uncertainty.”
In short, today’s ISM release confirms what we have seen in other economic indicators. The U.S. economy is stuck in neutral, with more job creators worried about the future. We continue to see more and more evidence of the slowdown among businesses and consumers. Policymakers need to act as soon as possible to address the fiscal situation to ease economic anxieties to jump start growth. Without pro-growth policies from Washington the economy will remain stuck in neutral.
Chad Moutray is chief economist, National Association of Manufacturers.