ISM's Grim Message: Diminished Activity Without Lower Prices
WELLS FARGO
2024-08-03It has been gloomy for two years in the manufacturing sector, but today's ISM report shows that various measures of activity...
It has been gloomy for two years in the manufacturing sector, but today's ISM report shows that various measures of activity have sunk to levels not seen since the initial arrival of the pandemic. Most troubling is that this suffering comes without the merit of lower prices.
Diminished Activity with Nothing to Show for It on Prices
The ISM Index, a long-trusted bellwether for the manufacturing sector, sunk even deeper into contraction territory in July coming in at 46.8, a reading just spitting distance from its lowest levels of the past three years (chart). Only two components were above the 50-line of demarcation between expansion and contraction: prices paid and supplier deliveries. This is a troubling development as it signals that higher interest rates are hurting activity without the intended outcome of further lowering prices.
The fact that the supplier deliveries index was positive ought to be taken with a grain of salt. The rationale behind this component is that (in an ordinary cycle) when companies are waiting on the loading dock for a shipment to arrive, it typically signals that activity must really be humming and that robust demand is making inputs scarce. It is hard to see things that way today given the fact that production slumped to 45.9, the lowest reading since the pandemic. Also, new orders have been in contraction territory for four-straight months and fell another 1.9 points to 47.4 in July. What's more likely in our view is that firms have pulled forward demand ahead of coming tariff hikes and shipping disruptions emanating from continued attacks in the Red Sea. This may also be a factor in reportedly higher prices.
Manufacturing Layoffs?
The employment metric registered the largest decline, slipping nearly six points last month to 43.4, or the lowest index reading since the pandemic drove millions of workers out of employment. Just two of the 18 industries included in this release reported an increase in hiring last month, and the report noted "Respondents' companies are continuing to reduce head counts through layoffs, attrition and hiring freezes." While this reading doesn't look good for tomorrow's employment report, the regional Fed purchasing manager surveys' employment components were not nearly as weak (chart).
It has been gloomy for two years in the manufacturing sector, and today's report suggests it will be some time before conditions improve. Manufacturers continue to face higher rates and tighter lending standards, but increased macro uncertainty is denting capex plans. Take it from a respondent in the transportation equipment industry: "Demand continued to soften into the second half of the year... the election in November remain weighing concerns."
