US Manufacturing Activity Slows Sharply In July

Today’s ISM Manufacturing report—the first economic data point for July—reflects a sharp slowdown. Although the ISM index is still above 50, indicating growth, it fell to its lowest level in two years.

Given the current climate, no one can dismiss this as a statistical quirk. There are simply too many risks lurking. But neither should we jump to conclusions. Was the sharp deceleration in manufacturing activity last month a victim of fears over a potential default on Treasuries? If so, will the 11th hour deal to avert default revive the trend in the weeks and months ahead? No one really knows, of course, and so that leaves us to consider the numbers so far.
Based on the current data, it’s a mixed bag. For instance, consider how the ISM Manufacturing Index compares with the trend in three other metrics, as shown in the chart below. Clearly, the ISM has suffered a slowdown. Nonetheless, it still reflects growth by virtue of the above-50 reading, albeit by a hair at 50.9 for July. Somewhat more encouragingly, the stock market (S&P 500) still isn’t pricing in a new recession, as implied by equities’ trailing one-year return that’s still in positive territory. Recessions tend to be associated with negative year-over-year equity market performance and for the moment there’s still a tidy margin of comfort here via the S&P’s 17% gain vs. this time last year. Mr. Market, of course, makes mistakes at times and so that possibility can’t be ruled out.

Industrial production and new orders for durable goods are also higher on the year, although that doesn’t help much since both of these numbers are currenly updated only through June. As a result, the economic news in the days and weeks ahead deserve careful scrutiny for clues about the macro outlook.
Meantime, the latest point of statistical optimism remains last week’s drop in jobless claims. Today’s ISM report takes some of the shine off of any related hope that the next employment report will bail us out, but it’s not yet clear that the broad trend will succumb the full nine yards.
If the threat of a Treasury default is now off the table, if only temporarily, there’s hope that the uptick in clarity will bring a reprieve of sorts. Then again, expecting anything more than muddling through is probably expecting too much.
“These are the types of numbers that are consistent with what we saw with the GDP numbers,” Keith Hembre, chief economist at Nuveen Asset Management, says of this morning’s ISM update. “Absent a governmental shock, we would dredge forward with this stagnant economic performance. We’ll be mired in this 1 to 2 percent (growth) environment we have been in.”
In effect, we’re now suffering from a new slowdown in slow growth. “Manufacturing was really the one sector that was moving along quite nicely and now it’s decelerating,” notes John Silvia, chief economist at Wells Fargo Securities via Bloomberg. “Businesses have cut back on orders and employment because they are just not seeing the demand that they expected. The economy is just not picking up momentum in the second half.”
The question is whether the trend in the ISM report will find corroboration in the rest of July’s economic numbers. The first big clue arrives this Friday with the government’s employment report for July. According to, private sector job growth is due to pick up to a net rise of 100,000, or nearly double June’s sluggish pace. And the actual number is…