July’s ISM reading of 52.6% was down from 53.2% in June and less than the anticipated 53.0%. However, both the important production and new orders indices were up solidly and essentially flat, respectively, at 55.4% and 56.9%. Unfortunately, the employment index moved back below 50%, following a brief blip above in June. Comments from the respondents were fairly mixed, from moderately optimistic to a continuation of soft demand.
Bottom line: July’s ISM at 52.6% was again above 50%, and industry activity still looks much more solid than was the case at the start of the year. The fact that the employment index is now back below 50 is a little discouraging, and continues to reflect, as one comment below put it, a realignment of “staff to reflect $40-$50/barrel oil,” which is viewed as the new normal. On the more optimistic side was the behaviour of the new orders and production indices, both of which are good forward-looking indicators, and this should help factory orders moving forward. Overall, however, we continue to believe that any improvement in aggregate manufacturing activity is still likely to be slow and grinding, and the impact from the stronger dollar is still being felt. In addition, despite the sharp inventory drawdown in the second quarter, inventory-to-sales ratios are still far too high, and there is still plenty of excess production taking place globally (as noted by the wood producers), and demand from China and the rest of the world remains soft. Lastly, this report, in addition to comments from the various quarterly earnings reports, suggests that companies are still cautious on the outlook and still very much in cost reduction mode.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.