US manufacturing slows slightly; excess inventory is a major concern

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. manufacturing activity slowed less than expected in July and there are signs that supply constraints are easing, with a measure of prices paid for inputs by factories falling to a low two years, suggesting that inflation has probably peaked.

While Monday’s Institute for Supply Management survey showed a measure of contraction in factor employment for a third consecutive month, Timothy Fiore, chairman of the ISM survey committee on manufacturing companies, noted that “companies continue to hire at high rates, with little indication of layoffs”. , hiring freezes or downsizing through attrition. »

The better-than-expected ISM reading suggested the economy was not in recession despite a decline in gross domestic product in the first half of the year. Businesses, however, are sitting on excess inventory after ordering too much goods due to fears of shortages, which is driving down new orders.

“The post-pandemic inventory replenishment cycle is coming to an end amid slowing demand for consumer goods,” said Pooja Sriram, economist at Barclays in New York.

“This intensifies the risks of a harder landing in manufacturing later this year. That said, the headline PMI is likely to decline a bit further to readings consistent with an outright economic recession.”

The ISM index of domestic factory activity fell to 52.8 last month, the lowest level since June 2020, when the sector pulled back from a pandemic-induced slump. The PMI was at 53.0 in June. A reading above 50 indicates expansion in the manufacturing industry, which accounts for 11.9% of the US economy.

Economists polled by Reuters had expected the index to fall to 52.0. A reading above 48.7 over a period of time generally indicates an expansion in the overall economy.

Four of the six largest manufacturing industries – petroleum and coal products as well as computer and electronic products, transportation equipment and machinery – recorded moderate to strong growth last month.

High inflation remained a business complaint, even as overall input price increases began to slow significantly. Chemical makers said inflation is “slowing business” and also noted an “overstock of raw materials due to past supply chain issues and slowing orders.”

Food manufacturers reported that “many customers appear to be withdrawing orders in an effort to reduce inventory.” Textile mill operators said “ongoing delivery and personnel issues have eaten away at the bottom line.”

The ISM survey’s forward-looking new orders sub-index fell to 48.0 from 49.2 in June. This was the second consecutive monthly contraction. Combined with a steady reduction in order books, this suggests a further slowdown in manufacturing in the months ahead.

Many retailers, including Walmart, have reported excess inventory as soaring inflation forces consumers to spend more on lower-margin groceries rather than clothing and other general merchandise.

Stocks on Wall Street were trading slightly lower. The dollar fell against a basket of currencies. US Treasury prices were mostly higher.

REDUCTION OF SUPPLY CHUTE

The ISM measure of factory inventories hit a 38-year high in July. According to ISM’s Fiore, businesses have been most concerned about their inventory levels since the start of the COVID-19 pandemic two years ago, when a slowdown in manufacturing activity was expected.

The moderation in manufacturing also reflects a shift in spending towards services instead of goods and the impact of rising interest rates as the Federal Reserve tackles inflation. The U.S. central bank last week raised its key rate by an additional three-quarters of a percentage point. It has now raised that rate by 225 basis points since March.

The economy contracted by 1.3% in the first half of the year. Sudden swings in inventory and the trade deficit linked to struggling global supply chains are largely to blame, although overall momentum has cooled.

Supply bottlenecks are loosening, helping to curb inflation at the factory gate. The ISM measure of supplier shipments fell to 55.2 from 57.3 in June. A reading above 50% indicates slower deliveries to factories.

The survey gauge on prices paid by manufacturers dipped to 60.0, the lowest level since August 2020, from 78.5 in June.

“This should please the Fed and provide further evidence that rate hikes need not continue through 2023,” said James Knightley, chief international economist at ING in New York.

But the road to low inflation will be long. While the survey’s factory employment measure rose to 49.9, it remained in contractionary territory for a third straight month as manufacturers continued to express difficulty finding workers.

High turnover from resignations and retirements has also frustrated efforts to staff factories adequately. There were 11.3 million unfilled jobs across the economy at the end of May, with almost two job vacancies for every unemployed person.

“This report is consistent with the Fed’s desire to give supply a chance to catch up with demand, but there is still a long way to go as the manufacturing sector appears to continue to struggle with shortages,” Conrad DeQuadros said. , Senior Economic Advisor. at Brean Capital in New York.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)

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