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First Cut: ISM Manufacturing Index holds on to narrow expansion in July

The ISM Manufacturing Index held on to its pace of narrow expansion in July with a reading of 51.2 after 51.7 in June. Three of the five components rose in July, but the two declines shaved a bit off activity overall. The factory sector expanded for a 35th month in a row, but at this juncture could easily slip into a mild contraction if some uncertainties facing it are not resolved soon — mainly trade and tariff policy.

The ISM index has to get closer to a reading of 45 before it is actually equated with a recession. However, sustained readings this low suggest that the robust conditions of the past two years are over and growth will be harder to come by.

New orders managed a small 0.8 point increase to 50.8 in July after 50.0 in June. Order backlogs — which are not a component — fell to 43.1 in July after 47.4 in June and were the lowest since 42.6 in January 2016. While orders are coming in, there is less and less in the pipeline to keep production going should orders lose any more steam. Production fell 3.3 points to 50.8 in July, its lowest level since 50.0 in August 2016.

Employment remained a positive, but fell to 51.7 in July from 54.5 in June and was at its lowest since 49.7 in September 2016. New hiring may now be more reliant on sectors like services and construction for its strength.

Delivery times widened to 53.3 in July after 50.7 in June and are back to levels seen for most of 2019. The movement of commodities along the supply chain are seeing fewer delays than was the case for 2018, but have not yet sped up to the point where it is a concern. Inventories hovered right around neutral for a third month in a row. The July index of 49.5 was little changed from the 49.1 in June or 50.9 in May. Businesses have responded quickly after the initial slowdown in activity late in 2018 to prevent any buildup of unnecessary stocks.

The price paid index was its lowest since 38.3 in February 2016. The index was at 45.1 in July after falling to 47.9 in June. Costs for energy and other commodities — especially imports — have lost upward momentum as activity as faded.

The index for export orders has been consistently soft in recent months, barely above or below the neutral mark. In July, export orders fell to 48.1, its lowest since 46.4 in February 2016. Sluggish global economic conditions have cut into exports as well as stalled trade negotiations with China. Imports fell to 47.0 in July, its slowest since 46.8 in August 2016. Factories have cut back on importing goods in part due to concerns about costs related to tariffs, and in part because there is less need for them.

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