The pace of growth in the U.S. manufacturing industry moderated a bit in July as new orders and production scaled back from June levels. Nevertheless, the U.S. manufacturing sector continues to expand: the nation’s leading factory index, the Institute for Supply Management’s PMI, registered 56.3 percent in July, a decrease of 1.5 percentage points from the June reading of 57.8 percent. Any number over 50 indicates the industry is expanding.
At the same time, the price index for raw materials increased by 7 percentage points over June’s level of 55 percent to reach 62. “The [ISM's] Business Survey Committee noted price increases in many areas, including metals [steel, aluminum, non-ferrous metals, precious metals]; food products, including corn and wheat; electronic components; lumber and wood products; and chemicals, including several types of plastic resins,” said Timothy R. Fiore, chair of the ISM’s Manufacturing Business Survey Committee This is the 17th consecutive month of price increases, according to the ISM, with July’s pace significantly outstripping June’s.
Electronic components made the ISM’s list of commodities up in price for the second consecutive month and supply shortages were reported in capacitors, integrated circuits, mechanical components, memory and resistors. This is the fifth straight month electronic components have been in short supply.
Prices haven't suddenly spiked, Fiore explained: raw materials prices are rebounding to the level they reached in May. Suppliers might be successful in maintaining higher prices, he added, since manufacturers of finished goods are reporting strong sales and earnings for the second calendar quarter. An executive from the nation's computer and electronic products sector reported “huge sales numbers, and backlog is growing." “[We are] starting to see better order entry and [are] planning on a turnaround for 2018,” said a manager from the electrical equipment, appliances and components sector.
The ISM’s new orders index registered 60.4 percent, a decrease of 3.1 percentage points from the June reading of 63.5 percent; and the production index registered 60.6 percent, a 1.8 percentage point decrease compared to the June reading of 62.4 percent. The employment index also scaled back to 55.2 percent, a decrease of 2 percentage points from the June reading of 57.2 percent. “Business Survey Committee Members are beginning to mention an increase in turnover, with employees leaving for other opportunities," Fiore said. "Overall, labor issues are becoming more prevalent.”
Fiore expressed some concern regarding the drop in new orders. “We operate under the idea that as long as the PMI and production is strong everything else will follow,” he said. However, among the 18 industries tracked by the ISM, there were some strong gains offset by precipitous drops in new orders. Although seasonality is stripped out of the ISM index, one of the bigger market segments—transportation equipment and machinery—typically stalls at this time of year. These companies build up inventory in the spring and then momentum drops off, Fiore said. “Order placements remained strong across most industry sectors in spite of seasonality factors including changes in demand and vacation periods,” he added.
In fact, July was the fourth best month during the past year. “The industry has been expanding for 11 straight months,” Fiore said. “Comments from the panel generally reflect expanding business conditions, with new orders, production, employment, backlog and exports all growing in July compared to June, as well as supplier deliveries slowing (improving) and inventories unchanged during the period,” he concluded.