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First Cut: ISM Non-Manufacturing Index slows slightly in July, feeling the pinch of tariffs a bit

The ISM Non-Manufacturing Index for July slipped to 53.7 after 55.1 in June. Activity diminished for a second month in a row. The index was the lowest since 53.4 in February 2016. Survey respondents’ comments suggest that tariffs are having an impact on activity and pushing come costs higher. However, the tone was overall positive and conditions favorable for further expansion. The index extended its string of expansionary readings to 114 months.

The ISM Manufacturing Index was also lower in July at 51.7 from 52.1 in the prior two months. Both manufacturing and services are operating with less vigor so far in 2019 compared to last year. However, manufacturing is feeling the pinch of tariffs on costs and supplies more than the service sector.

The index components pointed to slower business activity (53.1 in July after 58.2 in June and the lowest since 51.8 in August 2016). New orders were also down (54.1 in July after 55.8 in June and the lowest since 51.4 in August 2016). Order backlogs — not a component of the index — dipped (53.5 after 56.0) and hinted that slower incoming orders are leading to working down backlogs and leaving less in the pipeline to smooth over any fluctuations in new orders. Employment was up (56.2 after 55.0). Hiring has been somewhat uneven, but part of that is labor shortages for some skilled workers in addition to uncertainty in business conditions. Supplier deliveries were unchanged at 51.5, a level that points to activity that is neither heating up nor bogged down.

Inventories — not an index component — returned to a neutral 50.0 reading in July after a brief uptick in the prior two months. Businesses are carefully avoiding any buildup of unwanted stocks. Inventory sentiment reflected higher concerns about inventory accumulation(60.5 in July after 58.5 in May and June).

The prices paid index slipped to 56.5 in July after 58.9 in June, unwinding some of the runup in energy costs.

Export orders lost momentum (53.5 in July after 55.5 in June) and have been generally softer in comparison to 2018 since the start of 2019. Imports were up a bit (53.5 after 50.0 in May and June) as businesses brought necessary materials and services to meet present demand in spite of higher costs.

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