(Click on image to enlarge)

ISM chart and excerpts below by permission from the Institute for Supply Management® ISM®

Please consider the July 2024 Manufacturing ISM^® Report On Business^® emphasis mine.

The U.S. manufacturing sector contracted for the fourth consecutive month in July, as the Manufacturing PMI® registered 46.8 percent, down 1.7 percentage points compared to June’s reading of 48.5 percent. “After breaking a 16-month streak of contraction by expanding in March, the manufacturing sector has contracted the last four months, and at a faster rate in July.

Of the five subindexes that directly factor into the Manufacturing PMI^®, only one (Supplier Deliveries) was in expansion territory, up from zero in June. The New Orders Index remained in contraction and moved downward in July.

None of the six biggest manufacturing industries registered growth,” says Fiore. A reading above 50 percent indicates that the manufacturing sector is generally expanding; below 50 percent indicates that it is generally contracting.

Production

The Production Index continued in contraction territory in July, registering 45.9 percent, 2.6 percentage points lower than the June reading of 48.5 percent. None of the six largest manufacturing sectors reported increased production. The index recorded its lowest performance since May 2020, when it registered 34.2 percent. “Panelists’ companies significantly reduced output levels compared to June. New order rates remain weak, and backlog levels continue to decline. Companies continue to avoid investing in inventory due to the current economic uncertainty,” says Fiore. An index above 52.2 percent, over time, is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.

Employment

ISM^®’s Employment Index registered 43.4 percent in July, 5.9 percentage points lower than the June reading of 49.3 percent. The index recorded its lowest level since a reading of 42 percent in June 2020. “The index contracted for the second consecutive month after an expansion in May, which broke a seven-month streak of contraction. None of the six big manufacturing sectors expanded employment in July. Respondents’ companies are continuing to reduce head counts through layoffs, attrition and hiring freezes. Panelists’ comments in July indicated a notable increase in staff reductions compared to June, supported by the approximately 1-to-1.8 ratio of hiring versus head-count reduction comments,” says Fiore. An Employment Index above 50.3 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.

Order Backlogs

ISM^®’s Backlog of Orders Index registered 41.7 percent, the same reading as in June, indicating order backlogs contracted for the 22nd consecutive month after a 27-month period of expansion. For the second consecutive month, the index recorded its lowest reading since November 2023, when it registered 39.3 percent. None of the six largest manufacturing industries reported expanded order backlogs in July. “The index remained in contraction in July, as new order rates were insufficient to allow backlogs to grow. After 22 months of backlog contraction, it is believed that order books are now at historically low levels,” says Fiore.

Respondent Comments

• “Business is relatively flat — the same volume, but smaller orders.” [Chemical Products]
• “Demand continued to soften into the second half of the year. Supply chain pipelines and inventories remain full, reducing the need for overtime. Geopolitical issues between China and Taiwan as well as the election in November remain weighing concerns.” [Transportation Equipment]
• “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.” [Food, Beverage & Tobacco Products]
• “Availability of parts is good, with small exceptions of missing materials here and there. Ordering is still well below typical levels as we continue to burn down inventory of raw goods, with ‘normal’ ordering trends expected to return sometime in the second half of 2024.” [Computer & Electronic Products]
• “It seems that the economy is slowing down significantly. The number of sales calls received from new suppliers is increasing significantly. Our own order backlog is also diminishing. We are hoping for an increase in customer demand, or we will possibly need to make organizational changes.” [Machinery]
• “Unfortunately, our business is experiencing the sharpest decline in order levels in a year. We were well below our budget target in June; as a result, it was the first month this year that we had negative net income.” [Fabricated Metal Products]
• “Business is slowing, and we are taking cost actions.” [Electrical Equipment, Appliances & Components]
• “Some markets that are usually unwavering are showing weakness. Weather is the common factor, but only so much.” [Nonmetallic Mineral Products]
• “Our sales forecast for July and August are slow, but we’re making every attempt to remedy that situation. Our medical end-user customers continue to meet their forecasts, which is promising.” [Textile Mills]
• “Elevated financing costs have dampened demand for residential investment. This has reduced our need for component products and inventory.” [Wood Products]

Bloomberg Econoday Consensus

The Bloomberg Econonday economists’ consensus was 48.8, an increase from 48.6 in June.

ISM reported 46.8, lower than every estimate. The Econoday range was 48.0 to 50.1.

Production, Employment, Backlogs

Those three key components are related.

To smooth out fluctuations in orders, manufacturers will turn to backlogs.

Once backlogs are depressed, manufacturers will reduce hours and production.

If orders still decline, manufacturers need to reduce headcount, and that’s where we are now.

New orders don’t seem to be declining all that fast. But one respondent’s comment may be telling, “the same volume, but smaller orders”.

Orders are still coming in, but the associated work is decreasing. There was not one positive respondent comment in the bunch.

Rising prices is a stagflation signal. But that won’t last long.

Small Business Employment Growth Is Now Negative

Yesterday, I commented Small Business Employment Growth Is Now Negative (and What It Means)

ADP data shows year-over-year payroll growth is negative 88,000 for small corporations sized 20-49. Trends are negative in all but very large corporations.

On July 26, I commented Expect the BLS to Revise Job Growth Down by 730,000 in 2023, More This Year

At the heart of these revisions is a horribly flawed birth-death model used by the BLS. My calculation closely matches an estimate by Bloomberg’s chief Economist.

In addition to the birth-death model, or perhaps explaining the birth-death model errors, small business employment is declining fast.

“All Hell Breaks Loose” In the Next Few Months as Recession Bites

On July 25, I commented “All Hell Breaks Loose” In the Next Few Months as Recession Bites

Two of us are still adamant that a recession has started. The other is Danielle DiMartino Booth, in her best video yet. Please take a look.

More By This Author:

Small Business Employment Growth Is Now Negative (And What It Means)
Fed Is Attentive To The Risks To Both Sides Of Its Dual Mandate
The Housing Bubble Keeps Expanding, Case-Shiller Home Prices Hit New Record