US manufacturing slows slightly; excess inventory weighs on new orders

Ford Assembly workers install a battery on the chassis of a Ford Focus electric vehicle at the Michigan Assembly Plant in Wayne, Michigan November 7, 2012. REUTERS/Rebecca Cook

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  • The manufacturing index fell to 52.8 in July from 53.0 in June
  • New orders down, supplier deliveries up
  • Slowing of the rise in input prices; accumulating inventory

WASHINGTON, Aug 1 (Reuters) – U.S. manufacturing activity slowed less than expected in July and there are signs that supply constraints are easing, with a measure of prices paid for inputs by factories falling at a two-year low, suggesting that inflation has probably peaked. .

While Monday’s Institute for Supply Management survey showed a measure of contraction in factor employment for a third consecutive month, the ISM noted that “companies continue to hire at high rates , with little indication of layoffs, hiring freezes or downsizing through attrition.”

The better-than-expected ISM reading suggested the economy was not in recession despite a decline in gross domestic product in the first half of the year. But businesses are sitting on excess inventory after ordering too many goods due to fears of shortages, hurting new orders.

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“There are signs of slowing new order rates as panelists grow increasingly concerned about excessive inventory and record delivery times,” said Timothy Fiore, chairman of the ISM Business Survey Committee. manufacturing.

“Employment activity remained strongly positive despite uncertainty in new order rates.”

The ISM index of domestic factory activity fell to 52.8 last month, the lowest level since June 2020, when the sector pulled back from a pandemic-induced slump. The ISM index was at 53.0 in June. A reading above 50 indicates an expansion in the manufacturing industry, which accounts for 11.9% of the US economy.

Economists polled by Reuters had expected the index to fall to 52.0. A reading above 48.7 over a period of time generally indicates an expansion in the overall economy.

Four of the six largest manufacturing industries – petroleum and coal products as well as computer and electronic products, transportation equipment and machinery – recorded moderate to strong growth last month.

High inflation was also a major business complaint, even as overall input price increases began to slow significantly. Chemical makers said inflation is “slowing business” and also noted an “overstock of raw materials due to past supply chain issues and slowing orders.”

Food manufacturers reported that “many customers appear to be withdrawing orders in an effort to reduce inventory.” Textile mill operators said “continuous delivery and staffing issues have eaten away at the bottom line.”

COOLING DEMAND

The ISM survey’s forward-looking new orders sub-index fell to 48.0 last month from 49.2 in June. This was the second consecutive monthly contraction. Combined with a steady reduction in order books, this suggests a further slowdown in manufacturing in the coming months.

The cooling also reflects a shift in spending towards services instead of goods and the impact of rising interest rates as the Federal Reserve tackles stubbornly high inflation. The U.S. central bank last week raised its key rate by an additional three-quarters of a percentage point. It has now raised that rate by 225 basis points since March. Read more

The economy contracted by 1.3% in the first half of the year. Sudden swings in inventory and the trade deficit linked to struggling global supply chains are largely to blame, although overall momentum has cooled.

Supply bottlenecks appear to be easing. The ISM measure of supplier shipments fell to 55.2 from 57.3 in June. A reading above 50% indicates slower deliveries to factories.

The improvement helped curb factory gate inflation last month. A measure of prices paid by manufacturers dipped to 60.0. It was the lowest level since August 2020 and was down from 78.5 in June. But the road to low inflation will be long.

While the survey’s factory employment measure rose to 49.9, it remained in contractionary territory for a third straight month. Tech companies like Tesla have been laying off workers, but many manufacturers as recently as June expressed difficulty finding workers.

There were 11.3 million unfilled jobs across the economy at the end of May, with almost two job vacancies for every unemployed person.

The ISM survey found that “although an overwhelming majority of panelists again indicate that their companies are hiring, they are still struggling to meet workforce management plans.”

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Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao

Our standards: The Thomson Reuters Trust Principles.

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