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First Cut: Kansas City Fed Manufacturing Index for July turns in first negative reading since August 2016

The composite manufacturing index in the Kansas City Fed’s Manufacturing Survey posted a -1 in July after 0 (zero) in June and was the first negative reading since -2 in August 2016. The index decline is not a drastic warning about conditions in the District, but it reflects softness in all aspects of the survey. The composite index for six months from now fell to 9 in July from 11 in June, and was the lowest since 8 in June 2016.

Survey respondents cited trade and tariffs as a major concern, as well as adverse weather conditions that have had an impact on conditions in the region. While most remained relatively confident, it is for continued activity at a slower pace with more unknowns to contend with.

The index for new orders fell to -2 in July after 5 in June, and order backlogs were down to -13 after -7, and have contracted in the past four months. There are few orders coming in and less in the pipeline to keep activity going. The index for new export orders was -6 in July after -4 in June, reinforcing that uncertainty in trade policy having an impact.

The volume of shipments reached neutral in July after two months of contraction. The slowing in production deepened to -6 in July after -3 in June.

The index for employment fell to -6 in July from 5 in June, and was the first negative since -4 in September 2016. The workweek contracted to -4 in July after 0 (zero) in June and was the first negative since -2 in April 2017.

Supplier delivery times widened to 6 in July from -3 in June, but were more-or-less on trend for 2019 to-date. Inventories hovered near neutral in July. Materials inventories were 1 after -3 in June and 0 (zero) in May. Inventories of finished goods were -1 in July after 6 in June and 8 in May. Businesses are adjusting rapidly to slower economic conditions.

The index for prices paid rose to 15 in July after 9 in June. Some survey respondents noted that tariffs were pushing up costs. Price received slipped to 2 from 3 in the prior month and are generally consistent with less ability to pass through higher costs.

The Kansas City-ISM equivalent index — calculated from the five components closest to the ISM Manufacturing Index — fell to 49.1 in July after 50.6 in June. It was the first below-50 reading since 48.7 in August 2016. The correlation with the ISM number is in the middle of the five District Bank surveys of manufacturing. It adds to the possibility that the ISM Manufacturing Index for July could soften further from the 51.7 in June when the data is released at 10:00 ET on Thursday, August 1.

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