Manufacturing hits highest level in 12 months in July, notes ISM report

July manufacturing output posted its best numbers in several months, at a time when the global economy continues to deal with the ongoing impact of the COVID-19 pandemic, according to data released today by the Institute for Supply Management (ISM).

In its monthly Manufacturing Report on Business, ISM reported that the report’s key metric, the PMI, came in at 54.2 (a reading of 50 or higher indicates growth), for a 1.6% gain over June’s 52.6, with June snapping a three-month stretch of PMI declines. The July PMI also represents the highest PMI reading over the last 12 months and is 5.6% higher than the 12-month average of 48.6. ISM also reported that the overall economy grew for the third straight month in July, following a decline in April, which snapped a stretch of 131 consecutive months of economic expansion.

ISM reported that 13 of the 18 manufacturing sectors it tracks saw growth in July, including: Wood Products; Furniture & Related Products; Textile Mills; Printing & Related Support Activities; Food, Beverage & Tobacco Products; Plastics & Rubber Products; Chemical Products; Apparel, Leather & Allied Products; Computer & Electronic Products; Primary Metals; Petroleum & Coal Products; Miscellaneous Manufacturing; and Electrical Equipment, Appliances & Components. The three industries reporting contraction in July are: Transportation Equipment; Machinery; and Fabricated Metal Products.

Most of the report’s key metrics headed in the right direction in July.

New orders, which are commonly referred to as the engine that drives manufacturing rose 5.1%, to 61.5, growing at a faster rate for the second consecutive month, with each of the top six manufacturing sectors expanding.  This reading also marks the highest new order reading going back to September 2018’ 61.8.

Production, at 62.1, was also up for the second consecutive month, topping June’s 57.3 reading by 4.8%, on the way to its best reading since August 2018’s 63.1 reading, with five of the top manufacturing sectors showing gains. Employment, at 44.4, was up 2.2% over June’s 42.1, with the segment down for the 12th consecutive month and at a slower rate when compared to June, said ISM. Only five manufacturing sectors saw growth in July.

July supplier deliveries, at 55.8 (a reading above 50 indicates contraction) came in 1.1% below June’s 56.9, with 12 of 18 manufacturing sectors reporting slower supplier deliveries for the month. Inventories were down 3.5%, to 47.0, contracting after two months of growth, and customer inventories, at 41.6, were down 3.0%%, down for the 46th consecutive month. New export orders rose 2.8%, to 50.4, and imports grew 4.3%, to 53.1.

Comments from ISM members included in the report were somewhat mixed, with COVID-19 remaining and upticks in business serving as the key themes.

A computer & electronics products respondent said that the manufacturing outlook has improved greatly in June, as business has resumed at nearly 100 percent, adding that his company has implemented a number of safeguards that are costing extra money.  A chemical products respondent said that orders are up 35%-to 40%, and a miscellaneous manufacturing respondent observed that his company is still seeing customers shut down or affected by COVID-19, with hopes for a September bounce back.

In an interview, Tim Fiore, Chair of the ISM’s Manufacturing Business Survey Committee, noted that prior to June and July, manufacturing has had what he called a long series of contractions.

“The PMI leads us out of recessions and into recessions,” he said. “What this data is saying is that we all know we are in a recession now, but the PMI [reading] says we are coming out of it.”

On an overall basis, Fiore said that manufacturing grew around 17% from June to July, which he described as positive, and the numbers coming in at the high end of what was expected.

“The demand side was very strong, not only because of new orders coming in over 60 but also because but new export orders grew after several months of contracting,” he said. “Backlog of orders improved, too, and customer inventories dropped even further. Demand seems to be very strong, but it is coming off of a very low level in June.”

Production growth, he said, was not entirely surprising, as June was a recovery month with July continuing to show further recovery, as more people returned to work.

Looking ahead, Fiore said that future manufacturing growth will be contingent on continued growth for new orders, both from a new export standpoint and a domestic standpoint.

“The Chinese economy is still not doing well, with its PMI number still very weak,” he said. “Europe is worse off than we are now, but there are signs that it may end up being better off, as there are signs it has been able to better curb the outgrowth of COVID-19 better than we have. No U.S. state is going to shut down an economy. There are counties that are going to restrict it, but they are not going to shit down the whole economy either. It will be a struggle and an up and down kind of thing. The August PMI should be around 53, which is not too bad considering where we came from. I think we are in recovery mode and [manufacturing] is leading the economy or indicating that the economy is coming out of recession in the third quarter.”

And he added that while COVID-19 is the biggest global issue, there are various domestic issues, including the election, continuing trade issues in the form of countermeasures like the European Union possibly issuing counter-tariffs, U.S.-China trade issues, which are not going away, as well as the ongoing major geopolitical issues between the U.S. and China, with the latter likely to be the longest-term constraint for growth even after COVID-19 eventually is in check.

Domestically, he said that the U.S. is moving forward with re-shoring efforts as it has for the last year and a half, with no signs of that slowing down.

“That is due to the risk of having extended supply chains, with most single-sourced activity coming over the water, coupled with geopolitical issues and health issues,” he said. “That is going to continue, and what that means for the long-term in the U.S we will have to see.”