According to a report by the Institute for Supply Management (ISM) published on August 1.
Post-pandemic inventory glut and a growing trade deficit caused by global supply chains are the main culprits, although overall economic momentum has slowed after the economy contracted 1.3% in the first semester of the year.
The ISM index fell 0.2% to 52.8%, the lowest figure since June 2020, from 53.0% in June, above the previous forecast of 52%.
Manufacturing accounts for 11.9% of the US economy, and any reading above 50 indicates expansion in this sector.
The report also showed manufacturers’ operating costs fell to their lowest level in two years, with some experts saying the economy may have peaked in inflation.
The global supply chain crisis appears to be easing for the time being as supply deliveries have improved, prices have started to flatten and inventories have increased at a faster rate than two years ago. month.
The ISM measure of supplier shipments fell to 55.2 from 57.3 in June.
Consumer demand continued to weaken in July as new orders fell to 48% from 49.2% in June, taking a hit to the production index due to weaker demand , down 1.4%, to 53.5% from 54.9%. in June.
Meanwhile, the new orders index came in at 48 percent, down 1.2 percentage points from June’s 49.2 percent.
Changing consumers and different hiring rates
The slowdown in demand reflects both a shift in consumer spending from goods to services and the impact of rising interest rates.
Manufacturers fear that when these factors are combined with a steady reduction in order books, the sector could continue to slow in the remaining months of 2022.
Businesses are also still facing an inventory overload, having previously ordered too many items during the pandemic in the second half of last year, which hurt new order contracts.
“There are signs of slowing new order rates as panelists grow increasingly concerned about excessive inventory and record delivery times,” said Timothy Fiore, chairman of the ISM Business Survey Committee. manufacturing.
“Employment activity remained strongly positive despite uncertainty in new order rates.”
Although the survey indicated that employment in the manufacturing sector had increased, to 49.9%, the figures are in their third consecutive month of contraction.
Companies continue to hire at relatively high rates at the moment, and there have been few signs of widespread layoffs outside of the real estate and tech sector.
Hiring freezes and downsizing through attrition have yet to become a concern, as many manufacturers still express difficulty finding workers, with many positions left vacant.
“Although an overwhelming majority of panelists again indicate that their companies are hiring, they still struggle to meet workforce management plans,” Fiore said.
For example, four of the six major manufacturing industries, such as energy, computers/electronics, transportation equipment and machinery, recorded moderate to strong growth in July.
The food processing industry has reported that grocers and food distributors are apparently cutting product orders in a bid to reduce inventory, while the textile industry is facing continued deliveries and shortages. of staff that reduced profits.
Rising inflation is one of the main complaints flagged by the survey, although overall input price increases have started to moderate considerably.
Chemical manufacturers, for example, reported that inflation is slowing business, as well as an excess of raw materials due to past supply chain issues, combined with a slowdown in orders.
The Federal Reserve on July 27 raised its key rate an additional 75 basis points and raised the rate a total of 225 basis points since March as it faces high inflation.
Easing supply chain bottlenecks helped rein in factory gate inflation in July, with the measure of prices paid by manufacturers dipping to 60.0, the lowest level since August 2020 and a reduction from 78.5 in June.
Reuters contributed to this report.