US production growth cooling; bottlenecks start to subside

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  • ISM manufacturing index drops to 59.5 in July
  • New order size falls, employment measure rises

WASHINGTON, Aug. 2 (Reuters) – US manufacturing activity grew at a slower pace for the second consecutive month in July as raw material scarcity continued, although there are signs of some easing of supply chain bottlenecks.

The Institute for Supply Management (ISM) survey on Monday found that a measure of prices paid by manufacturers fell the most in 16 months, as the supplier supply index retreated further from a 47-year high recorded in May. was reached.
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Timothy Fiore, chair of ISM’s Manufacturing Investigation Committee, noted that “demand and supply dynamics appear to be moving closer to equilibrium for the first time in many months.” Part of that may be because spending is turning back to services from goods.

“Production is slowing from unsustainable growth to sustainable strength,” said Chris Low, chief economist at FHN Financial in New York.

“Moderate supplies to suppliers and prices paid indicate that bottlenecks are decreasing, but both remain high enough to indicate that supply-side problems persist. Still, progress from a market and policy perspective is important.”

The ISM index of national factory activity fell to 59.5 last month, its lowest level since January, from 60.6 in June. A reading above 50 indicates an expansion in the manufacturing sector, which makes up 11.9% of the US economy. Economists polled by Reuters had predicted that the index would change little at 60.9.

Seventeen of the 18 manufacturing industries reported growth in July, including machinery and computer and electronic products. Only textile mills reported a decline.

The ISM survey’s measurement of prices paid by manufacturers fell to 85.7 last month, from a record 92.1 in June, signaling an easing in commodity prices. The drop — the largest dip in the index since March 2020 — supports Federal Reserve Chairman Jerome Powell’s claim that inflation will ease as supply constraints ease.

The measure of supplier deliveries in the study fell from 75.1 in June to 72.5. The index rose to 78.8 in May, the highest level since April 1974. A reading above 50 indicates slower deliveries.

During the COVID-19 pandemic, demand for goods shifted from services as millions of Americans were locked in their homes, putting pressure on the supply chain. About half of the population has been fully vaccinated against the coronavirus, allowing people to travel, regularly visit restaurants, visit casinos and attend sporting events, one of the service-related activities that were curbed early in the pandemic.

Government data from last week showed that spending on services accelerated sharply in the second quarter, pushing gross domestic product levels above its peak in the fourth quarter of 2019. read more

US stocks traded higher, with the S&P 500 (.SPX) index near an all-time high as Congress pushed ahead with a $1 trillion infrastructure bill. read more

Autonomous robots assemble an X-model SUV at BMW’s factory in Greer, South Carolina, US Nov. 4, 2019. REUTERS/Charles Mostoller

the dollar (.DXY) fell against a basket of currencies. US Treasury bond prices rose.

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Still, anecdotes in the ISM survey suggested that the supply chain was far from normalized. Machine manufacturers said they have to “place orders months in advance to get a seat in line”.

In the computer and electronics industries, manufacturers reported that “purchases still have long lead times due to shortages of raw materials.”

The scarcity of inputs is well documented in the auto industry, where a global semiconductor shortage has forced some automakers to shut down assembly plants to manage their chip inventory.

The forward-looking new orders sub-index of the ISM survey fell for the second month in a row. But with plant inventories very thin and corporate warehouses nearly empty, the moderation in new orders growth is likely to reverse or remain minimal.

Companies had exhausted their inventories at a rapid pace in the second quarter. Stocks at retailers are well below normal levels. Economists at Goldman Sachs expect retail and auto inventories to return to normal levels by mid-2022.

Factories also hired more workers in July. Factory employment recovered in June after a modest contraction for the first time since November, although manufacturers continued to complain about labor shortages.

Still, the recovery bodes well for the July employment report, released Friday. According to a Reuters survey of economists, nonfarm payrolls are likely to have increased by 880,000 jobs last month, after rising 850,000 in June.

The economy is struggling with a labor shortage, with a record 9.2 million job openings. About 9.5 million people are officially unemployed.

Lack of affordable childcare and fear of contracting the coronavirus have been blamed for keeping workers, mostly women, at home. There have also been pandemic-related retirements and career changes. Republicans and corporate groups have blamed increased unemployment benefits, including a $300 weekly payment from the federal government, on the labor shortage.

While more than 20 states led by Republican governors have discontinued these federal benefits before they expire in early September, there is little evidence that the terminations boosted hiring.

The labor shortage is expected to ease in the fall when schools reopen for personal learning, but a resurgence in new COVID-19 cases, driven by the Delta strain of the coronavirus, could leave some people reluctant to return to the working population.

Reporting by Lucia Mutikani; Editing by Dan Burns, Nick Zieminski and Paul Simao

Our standards: The Thomson Reuters Trust Principles.

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