The numbers: A key barometer of American factories fell to a 25-month low of 52.8% in July in a sign of creeping weakness in the U.S. economy. The good news? Inflation pressures eased.
The Institute for Supply Management’s closely followed manufacturing gauge dipped from 53% in June, in no small part due to another decline in new orders.
Economists polled by The Wall Street Journal had forecast the index to total 52.1%. The closely followed report is viewed as a window into the health of the U.S. economy.
While any number above 50% signifies growth, the latest reading was the weakest since June 2020. The index has also declined three months in a row for the first time since the onset of the pandemic.
The silver lining in the report was some relief from inflation. Companies are still paying higher prices for supplies, but a gauge of inflation sank to a nearly two-year low.
It will take some time before the economy begins to benefit, however. The rate of inflation has jumped 9.1% in the past year, according to a popular index that tracks the cost of living.
Problems getting supplies also continued to clear up. Supply shortages have played a big role in the worst U.S. outbreak of inflation in almost 41 years.
Big picture: The U.S. economy has slowed since the end of last year due to soaring inflation, rising interest rates and the end of government stimulus. Gross domestic product, the official scorecard for the economy, has fallen two quarters in a row, meeting an old but informal definition of recession.
While factories are still running close to full tilt, business has slowed and it could get worse in the months ahead as a decline in orders suggests. New orders reflect future sales.
In some cases, customers over-ordered and are waiting to sell the products they have on hand. They are also worried about a recession.
“Our markets are still holding up; however, I believe a slowdown is coming,” a top executive at a company that makes metal parts told ISM. “We are cautious about going out too far with orders.”
- The index of new orders slid 1.2 points to 48%. That’s the lowest level since May 2020.
- The production barometer dropped 1.4 points to 53.5%.
- The employment gauge rose 2.6 points to 49.9%. Most manufacturers are still trying to hire, Fiore said, in a positive sign for the economy.
- The prices index, a measure of inflation, sank 18.5 points to 60%, the lowest level in almost two years. Most of the decline reflected lower energy prices.
Looking ahead: “The broad slowdown in the economy is apparent in the manufacturing sector as well,” said chief investment office Jim Baird of Plante Moran Financial Advisors. “Still, conditions are modestly expansionary, a welcome sign amid the pervasive negativity on the heels of last week’s GDP report.”
Market reaction: The Dow Jones Industrial Average DJIA, +0.36% and S&P 500 SPX, +0.30% fell slightly in Monday trades. The losses were extended after the ISM report.