U.S. Manufacturing Sector Contracts as New Orders Decline: ISM Survey

U.S. Manufacturing Sector Contracts, Reflecting Economic Concerns

The U.S. manufacturing sector experienced a contraction last month, reaching its lowest level in eight months, according to a survey conducted by the Institute for Supply Management (ISM). The Purchasing Managers’ Index (PMI) for the manufacturing sector was reported at 46.8 in July, a decrease of 1.7 percentage points from the previous month. This marks the fourth consecutive month of contraction and the 20th time in the past 21 months that economic activity in the manufacturing sector has declined. It is also the lowest manufacturing PMI level recorded in eight months.

Of the 16 industries monitored by the index, 11 experienced contraction in July, while the remaining five showed growth. Industries such as primary metals, plastics, machinery, electrical equipment, appliances, and transportation machinery saw a decline, while printing, furniture, and petroleum industries registered an increase.

Timothy R. Fiore, chair of the ISM manufacturing business survey committee, commented on the situation, stating, “U.S. manufacturing activity entered deeper into contraction. Demand was weak again, output declined, and inputs stayed generally accommodative.” He noted that out of the six largest manufacturing sectors, only two reported an increase in new orders in July. Panelists expressed concern about the lack of new order activity and a general lack of confidence in the future economic environment, reaching its lowest level since the coronavirus pandemic recovery.

Companies Hesitate to Invest in Inventory Amidst Economic Uncertainty

None of the six largest manufacturing sectors reported an increase in production, with firms hesitating to invest in inventory due to ongoing economic uncertainty. Fiore emphasized that current federal monetary policy and other conditions have led to companies displaying an unwillingness to invest in capital and inventory. The decision to keep interest rates unchanged has resulted in higher interest payments for loans, creating financial difficulties for businesses. Higher interest rates for an extended period could potentially weaken economic activity and employment, according to Federal Reserve Chair Jerome Powell.

Optimism About the Future

Despite the pessimism evident in the ISM survey, U.S. manufacturers expressed more optimism about the future in a second-quarter poll conducted by the National Association of Manufacturers (NAM). Close to 60 percent of respondents expect their company’s overall sales to increase over the next year, and a majority expect the level of exports to either increase or remain stable during this period. Respondents also warned against imposing more taxes on manufacturers, as it would limit capital investment opportunities, job creation, global competitiveness, and spending on research and development.

Potential for Interest Rate Cuts and Tax Policy Changes

ING, a banking and financial services firm, predicts that potential interest rate cuts and economic soft landing could bring renewed vibrancy to the manufacturing sector. Their report suggests that U.S. manufacturing output will experience higher growth in the coming years, with a projected 1.5 percent increase in 2024 compared to last year. Growth is expected to double next year, reaching 3 percent, before settling down to 2.5 percent the following year.

There have been calls for altering tax policies to boost American manufacturing. Adam Michel, director of Tax Policy at the Cato Institute, highlighted this issue during a hearing before the U.S. Congress Joint Economic Committee. Michel emphasized that the tax code currently discourages long-term capital investments. Adjustments to tax policies could potentially make building new plants and fabs more cost-effective, stimulating growth in the manufacturing sector.