US production slows down slightly; excess inventory a big concern

  • The manufacturing index falls to 52.8 in July from 53.0 in June
  • New orders in decline, improvement in supplier deliveries
  • Price increases due to slowing of inputs; stocks that accumulate

WASHINGTON, Aug. 1 (Reuters) – US manufacturing activity slowed less than expected in July and there were signs of easing of supply constraints, with a measure of prices paid for inputs from factories falling to a low of two. years, suggesting that inflation has likely peaked.

While the Institute for Supply Management survey on Monday showed a factor employment contract measure for the third consecutive month, Timothy Fiore, chairman of the ISM Manufacturing Business Survey Committee, noted that “companies continue to hire a high rates, with few indications of redundancies, freezing of hiring or reduction of staff due to attrition. “

The better-than-expected ISM reading suggested that the economy was not in recession despite a decline in gross domestic product in the first half of the year. Companies, however, are sitting on excess inventory after ordering too many goods due to concerns over shortages, depressing new orders.

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“The post-pandemic inventory restocking cycle is running out due to weakening consumer demand,” said Pooja Sriram, an economist at Barclays in New York.

“This intensifies the risks of a harder landing in the manufacturing sector by the end of the year. That said, the overall PMI would still have to decline somewhat to reach readings consistent with a full-blown economic downturn.”

The ISM National Industrial Activity Index fell to 52.8 last month, the lowest reading since June 2020, when the industry was retreating from a pandemic-induced crisis. The PMI was at 53.0 in June. A reading above 50 indicates an expansion in the manufacturing sector, which accounts for 11.9% of the US economy.

Economists interviewed by Reuters had predicted that the index would drop to 52.0. A reading above 48.7 over a period of time generally indicates an expansion of the economy as a whole.

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

High inflation remained a complaint among businesses, even as overall increases in factor prices began to slow considerably. Chemicals manufacturers said inflation was “slowing business” and also noted “overstocking of raw materials due to previous supply chain problems and slowing orders.”

Food manufacturers reported that “many customers appear to be taking orders in an effort to reduce inventory.” Textile factory operators said “continuing delivery and staffing problems have consumed profits.”

The ISM new orders forecast sub-index fell to 48.0 from a reading of 49.2 in June. It was the second consecutive monthly contraction. Coupled with a steady reduction in backlogs, this suggests a further slowdown in the manufacturing sector in the coming months.

Many retailers, including Walmart (WMT.N), have reported carrying excess inventory as rising inflation forces consumers to spend more on low-margin food items rather than clothing and other generic products.

Wall Street shares traded slightly lower. The dollar fell against a basket of currencies. US Treasury prices were mostly higher.

FARMING OF SUPPLY BOTTLE NECKS

The ISM measure of factory inventories increased to a high of 38 years in July. According to Fiore of the ISM, companies have shown the greatest concern 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 the manufacturing sector also reflects a shift in spending towards services from goods and the impact of rising interest rates as the Federal Reserve tackles inflation. Last week, the US central bank raised the key rate by another three-quarters of a percentage point. It has now raised that rate by 225 basis points since March. Read more

The economy contracted 1.3% in the first half of the year. The wild swings in inventories and the trade deficit linked to tangled global supply chains were largely responsible, although the overall momentum has cooled. Read more

Supply bottlenecks are easing, which helps curb inflation at the factory entrance. The ISM measure of supplier deliveries fell to 55.2 from 57.3 in June. A reading above 50% indicates slower deliveries to factories.

The indicator of prices paid by producers in the survey plunged 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 will not have to continue until 2023,” said James Knightley, chief international economist at ING in New York.

But the road to low inflation will be long. Although the survey’s factory employment measure rose to 49.9, it remained in contraction territory for the third straight month, with manufacturers continuing to express difficulties in finding workers.

High turnover related to resignations and retirements has also thwarted efforts to hire adequate staff in factories. At the end of May, there were 11.3 million job vacancies across the economy, with nearly two job vacancies for every unemployed worker.

“This report is consistent with the Fed’s desire to give the supply side 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,” he said. said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.

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Reportage by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao

Our Standards: Thomson Reuters Trust Principles.

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