The latest Manufacturing ISM Report On Business for July 2023 reveals that economic activity in the manufacturing sector has continued to contract for the ninth consecutive month. This decline follows a 28-month period of growth, signifying a challenging time for the nation's supply executives. The Manufacturing PMI for July registered at 46.4%, a slight improvement from June's 46%.
The report indicates that the overall economy has also contracted for an eighth month, following a 30-month period of expansion. The New Orders Index, a critical component of the Manufacturing PMI, remains in contraction territory at 47.3%, showing a slower decline compared to June. The Production Index saw a similar trend with a reading of 48.3%, slightly better than June's 46.7%. “Now that we have New Orders with two straight months of growth, demand is slowly coming back,” said Timothy R. Fiore, Chair, Manufacturing Business Survey Committee.
“Companies are ‘right-sizing’ their head count,” Fiore said Tuesday. The Employment Index dropped further into contraction at 44.4%, down from June's 48.1%. This represents its lowest reading since July 2020, indicating companies are actively managing headcounts down due to reduced demand.
One bright spot was the Supplier Deliveries Index, which improved for the tenth straight month at 46.1%. Faster deliveries indicate that suppliers have the capacity to meet current demand forecasts, although the index has been in contraction since October 2022.
The Inventories Index increased to 46.1%, suggesting manufacturing inventories contracted at a slower pace compared to June. While some industries like Petroleum & Coal Products, Machinery, and Food, Beverage & Tobacco Products increased their inventories, others, including Paper Products and Plastics & Rubber Products, experienced a decrease.
The report also highlights that customer inventory levels are appropriately balanced, potentially positive for future production. The Customers' Inventories Index rose to 48.7% in July, indicating customers have the right amount of inventory.
Raw materials prices continue to decrease, as the Prices Index reached 42.6%, an improvement from June's 41.8%. This indicates a buyers' market, with sellers focusing on filling orders to support their weak backlogs.
The Backlog of Orders Index, although still in strong contraction at 42.8%, showed a slowdown compared to June, as new order rates improved while production slowed down again.
Of the six biggest manufacturing industries, only Petroleum & Coal Products reported growth in July. The remaining five, including Apparel, Leather & Allied Products and Plastics & Rubber Products, reported contraction. “These are six attributes to indicate that we’re on a growth path,” Fiore said.
Looking ahead, panelists' comments indicate mixed sentiments about when significant growth will return, resulting in companies reducing production and managing headcounts to match demand. While the economic conditions remain challenging, there are positive signs of slight improvement, especially in comparison to the previous months.
More about the ISM Report On Business: The index is based on a survey of executives in 18 industries. The PMI is considered a leading economic indicator and a barometer of where manufacturing is headed.
An index reading above 50% indicates economic expansion, while below 50% shows contraction. The index has been in negative territory for three consecutive months. As of August 1, 2023, the PMI has averaged 47.51 the past 12 months.
