U.S. factory activity declined for the fourth straight month in July as weakening demand and ongoing trade anxiety weighed on manufacturers. The nation’s leading factory index, the PMI, fell to its lowest point since 2016, dropping by 0.5 percent to a level of 51.2.
“This is the fourth straight month of PMI decline without any bounce back, and that is alarming,” said Tim Fiore, chair of the Institute for Supply Management’s manufacturing business survey committee. “Usually we have a slide and then things rebound by a point or so—that’s not happening here.”
Six out of the 10 sub-indices tracked by the ISM reached contraction mode in July. Although new orders improved slightly—by 0.8 percent to 50.8 -- production declined by 3.3 percent to 50.8; employment decreased 2.8 percentage points to 51.7; and manufacturers’ backlog declined 4.3 percent to 43.1. Any number above 50 indicates expansion; anything below 50 signals contraction.
Of equal concern was the performance of two key industry sectors: computers/electronics and chemicals. Both had been weathering economic headwinds well, but their expansion is losing momentum, Fiore said.
“Chemicals are a building-block sector that feeds into other industries, and they are showing signs of weakness,” he explained. “Computers and electronics have been flying high – in spite of tariffs – but I think the Huawei issue is beginning to weigh things down.”
U.S. chip companies had been prohibited from selling their products to Huawei, one of the biggest networking companies in the world, but won a temporary reprieve. “There’s still concern about Huawei’s ability to buy U.S. chips,” Fiore said.
Overall, consumption -- as measured by the production and employment indexes -- continued to expand in July but at lower levels. This resulted in a combined decrease of 6.1 percentage points to the PMI calculation due to minimal new-order growth, backlog contraction and customer-inventory gains, Fiore said.
Inputs — expressed as supplier deliveries, inventories and imports — were lower this month, due to inventory tightening for the second straight month and continued slower supplier deliveries, resulting in a combined 3.0-percentage point improvement in the supplier deliveries and inventories indexes. Overall, inputs indicate that supply chains are responding marginally slower and supply managers are closely matching inventories to new orders.
Prices contracted for the second consecutive month, indicating lower overall systemic demand.
Demand set the tone for July, Fiore explained, as new orders growth was offset by several negative factors. “There’s no doubt that consumption is underutilized—there’s plenty of production capacity and opportunities for employment. But we have no demand.”
Prior to July, demand was weak -- but it was still there. “The low new orders number plus customer inventories growing again – we don’t want to see that,” Fiore said. “The contraction of backlog is also alarming. You generally want backlog to grow -- along with consumption and employment -- but with new orders drying up and backlog being consumed, there’s nothing left to work with.”
Optimism among manufacturing professionals is also waning, from a 3 to 1 positive/negative outlook to 1 to 1 in July. “For every person that said things are good, we had one person that expressed concern,” Fiore said.
Still, experts point out the PMI expanded, so overall, manufacturing continues to grow. “The PMI numbers out today show that manufacturing in America is certainly not dead – there’s definitely a pulse, even if it is weakening,” said Steve Rosen, CEO of Resilience Capital Partners.
But trade remains a significant issue, Fiore noted, with both imports and exports contracting in July. The same day the ISM report was released – August 1—President Trump announced he was imposing new tariffs on $300 billion in Chinese exports.
“China tariffs remain a concern,” said one computer and electronics executive. “The uncertainty of future tariffs involving China, Canada, and Mexico is also a concern. China tariffs for electronic parts are averaging 17 percent.”
“Despite the data,” Rosen said, “I remain confident that the U.S. commitment to open trade will ensure a common-sense resolution to the tensions with China. I think that commitment will outweigh the very real – but ultimately transitory – political, economic and financial issues separating the two nations.”