Report On Business® Roundup: July Manufacturing PMI®
After months of Manufacturing ISM® Report On Business® data that reflected a lengthy slump but at least stability, the July numbers dropped on Thursday morning with a disturbingly deep thud that resonated across the economic landscape.
The composite PMI® reading of 46.8 percent helped send the Dow Jones Industrial Average down 500 points and 10-year treasury yields below 4 percent. There was very little positive movement in the subindex readings, and amid lower-than-expected employment data this week, sentiment emerged that the ISM manufacturing report was a pivotal one.
In other words, bad news was bad news for markets, and the prospect of a long-awaited interest-rate cut in September offered limited relief.
“In the latest evidence that the economy is slow and possibly slowing significantly,” Bloomberg TV analyst Michael McKee said after the PMI® data was released, “the ISM (composite) number falls to 46.8 percent from 48.5 percent.” After noting that the Employment Index decreased while the Prices Index rose, McKee added, “So, bad news on what we’d call both sides of the (U.S. Federal Reserve’s) mandate.”
In June, there were no blinking red lights in the manufacturing report. However, Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® Manufacturing Business Survey Committee, used the term “alarming” to describe multiple July data points during a conference call of reporters on Thursday.
For starters, a nearly 2-percentage point drop in the composite PMI® in one month is concerning, he said. Earlier this year, the share of manufacturing sector gross domestic product (GDP) with a PMI® at 45 percent or lower (a good barometer of overall sector strength) amounted to a sliver. In June, it was 14 percent.
July brought an alarm-bell figure of 53 percent, with all six of the sector’s largest industries — Machinery; Transportation Equipment; Fabricated Metal Products; Food, Beverage & Tobacco Products; Chemical Products; and Computer & Electronic Products — in contraction.
The Employment Index reading of 43.4 percent was the lowest since June 2020 (42 percent), with survey respondents’ comments on staff reductions nearly doubling those about hiring. The New Orders and Production indexes contracted at a faster rate. Respondents’ comments on consumer spending and U.S. economic prospects were as gloomy as they’ve been in some time.
Comments in the ISM manufacturing report aren't upbeat. pic.twitter.com/AVw4Ky4j1F
— ForexLive (@ForexLive) August 1, 2024
“Even though we are used to a seasonal reduction in business over the summer, consumer behavior is changing more than normal. Sales are lighter, and customer orders are coming in under forecasts. It seems consumers are starting to pull back on spending,” wrote a respondent in Food, Beverage & Tobacco Products.
Fiore said an interest-rate cut in September will not be a quick panacea; that will take a least a quarter to show up in the PMI® numbers.
While only 13 percent of respondent’s general comments were on interest rates, Fiore said, “If we polled everybody on what’s the biggest thing holding back business in 2024, that’s what they would probably say. … Even if the Fed makes a move in September, it will take time for that to show up in the New Orders Index number. We’re stuck in low-output mode now.”
Also, federal investment policies — particularly on energy — factor into business plans, and it’s one of the areas the two parties diverge on most. Companies aren’t going to make big and expensive decisions until they know the balance of power in Washington in January, Fiore said: “They don’t want to get hung out to dry on something beyond their control.”
The closest thing to a happy face in the July data was the Customers’ Inventories’ Index, which decreased to 45.8 percent, a level that generally necessitates future production. “That’s really the only positive thing from a demand standpoint,” Fiore said.
The manufacturing sector makes up about 11 percent of U.S. GDP, so a thud for the sector is not necessarily heard universally. During ISM’s LinkedIn Live broadcast on Thursday, Fiore noted that manufacturing can have a hard landing, while the economy’s is softer.
ISM'S PMI Manufacturing report released today was grim for the mfg sector. Demand slumped, and output declined. Headcount is being shed due to lack of work.
— Naseem Malik (@theNaseemMalik) August 1, 2024
Interest rate uncertainty was a big factor cited, followed by the US elections.
But for U.S. factory activity, a slump is the soundtrack.
“I try to look at multiple data points,” Fiore said, “and when you look at overall sentiment being negative and a lot of companies potentially preparing for layoffs, I think manufacturing is kind of stuck for now, at least until after the election. We won’t see a lot of activity on inventory and capital investment. The signs are that it’s just not there.”
The Report On Business® roundup:
Barron’s: An Economic Reading You Rarely Pay Attention to Is Tanking the Stock Market. “Barron’s has industrial acolytes hanging around. We know the last time a PMI report had this impact was all the way back in 2019. It came in at (48.1 percent) for September, the worst number since June 2009. It signaled the end to about three years of strong growth. The number reported Thursday shows investors that the Federal Reserve might have waited too long to lower interest rates.”
CNBC: Construction Spending and ISM Manufacturing Both Miss on Estimates. “ISM Manufacturing for July headline number is expected to be below 50 (percent),” analyst Rick Santelli said, “and it is below 50: 46.8 percent is the weakest level since (November). ... If you look at the (Employment Index) on a week where we had a light reading on Wednesday from ADP and the (federal) jobs report for July tomorrow, it’s at 43.4 percent, it's the weakest level going all the way back to June 2020.”
Mace News: Manufacturing in Contraction for Fourth Straight Month as Soft Demand, Job Cuts Continue, Firms Await Fed Rate Cut. “Firms also remain concerned about supply chain disruptions amid heightened geopolitical risks, the ISM survey showed. The uncertainty over the results of the U.S. election in November is also keeping manufacturers uneasy about the future U.S. energy policy as to whether it will seek greener energy sources or rely heavily on oil and gas, Fiore said.”
Manufacturing Dive: Manufacturing Enters ‘Deeper Slowdown Period’ Ahead of Election: July PMI®. “Manufacturers are also holding off on other major investments until after the November presidential election. Given Republican nominee former President Donald Trump and likely Democratic nominee Vice President Kamala Harris’ different economic plans, Fiore said companies don’t want to be caught flat-footed by investing ahead of the administration change.”
MarketWatch: Slump Goes On: Manufacturing Contracts for Fourth Month in a Row, ISM Finds. “The industrial side of the economy is unlikely to gather steam until the Federal Reserve cuts interest rates. High borrowing costs have sapped the economy and curtailed demand for manufactured goods. ‘It seems that the economy is slowing down significantly,’ a senior executive at a machinery manufacturer told ISM.”
43.4 in the Manufacturing ISM Employment index is... the worst since June 2020 and at least the third notably worse-than-expected reading on the labor market we've gotten this week alone. 😨
— Matt Weller CFA,CMT (@MWeIlerFX) August 1, 2024
Reuters: U.S. Manufacturing Gauge Drops to Eight-Month Low. “The ISM survey’s forward-looking (New Orders Index) fell to 47.4 percent last month from 49.3 percent in June. Output continued to decline, with the (Production Index) sliding to 45.9 percent from 48.5 percent in June. Despite subdued orders, manufacturers faced higher prices for inputs, likely reflecting soaring freight rates. … Factory employment continued to shrink as firms reduce head counts through layoffs, attrition and hiring freezes.”
Yahoo! Finance: New Data Highlights Emerging Cracks in the Economy as Fed Debates Rate Cut. “The concern among economists remains that there are already signs of slowing in the labor market that warrant a closer look from the Fed. (The Employment Index) tumbled to a reading of 43.4 percent in July, down from 49.3 percent in June.”
ISM’s Services PMI® will be unveiled on Monday, and the Hospital PMI® on Wednesday. For the most up-to-date content on the reports under the ISM® Report On Business® umbrella, use #ISMPMI on X, formerly known as Twitter.
(Photo credit: Getty Images/Ric Aguiar)