U.S. Manufacturing Activity Declines Amid New Orders Slump

WASHINGTON (Reuters) – A measure of U.S. manufacturing activity dropped to an eight-month low in July amid a slump in new orders, but it likely exaggerates the industry’s struggles as production at factories rebounded sharply in the second quarter.

The Institute for Supply Management (ISM) reported that its manufacturing PMI fell to 46.8 last month, the lowest reading since November, down from 48.5 in June. A PMI reading below 50 indicates contraction in the manufacturing sector, which constitutes 10.3% of the economy.

Despite experiencing a decline for the fourth consecutive month, the PMI remained above the 42.5 level that the ISM stated generally indicates an expansion of the overall economy.

Economists polled by Reuters had anticipated a slight increase in the PMI to 48.8.

Higher interest rates have undercut manufacturing; however, the actual situation may not be as dire as sentiment surveys like the ISM suggest. Hard data from the government and Federal Reserve indicates that the industry has stabilized. Data from the Fed showed factory production rebounded at a 3.4% annualized rate in the second quarter, following a 1.3% contraction in the first quarter.

The Commerce Department recently reported an increase in spending on goods in the second quarter, rebounding from a soft start to the year, with motor vehicles contributing to economic growth.

On Wednesday, the U.S. central bank kept its benchmark overnight interest rate in the 5.25%-5.50% range, consistent since last July but indicated a possible reduction in borrowing costs as early as next month’s meeting in September.

According to the ISM survey, the forward-looking new orders sub-index fell to 47.4 last month from 49.3 in June. Output continued to decline, with the production sub-index dropping to 45.9 from 48.5 in June. Although orders are subdued, manufacturers are facing increasing prices for inputs, likely due to rising freight rates.

The survey’s measure of prices paid by manufacturers rose to 52.9 from 52.1 in June. Additionally, the measure of supplier deliveries increased to 52.6 from 49.8 in June, with a reading above 50 indicating slower deliveries.

Factory employment continued to shrink as firms reduce head counts via layoffs, attrition, and hiring freezes.