US output appeared to remain weak in July amid a gradual increase in new orders, but factory employment fell to a three-year low, suggesting that job cuts are taking hold.
The Institute for Supply Management (ISM) said on Tuesday that its manufacturing PMI rose slightly to 46.4 last month from 46.0 in June, the lowest reading since May 2020.
This is the ninth consecutive month the PMI has been below the 50 threshold, which indicates a contraction in output, the longest streak since the Great Recession of 2007-2009. Economists interviewed by Reuters had predicted the index would rise to 46.8.
Although the ISM survey continues to offer a gloomy assessment of the state of production, the actual data shows that the sector is moving slowly. Data from the Federal Reserve last month showed factory output rebounded in the second quarter, ending two consecutive quarters of declines.
The government reported last week that business spending on equipment rose strongly in the second quarter after declining in the previous two quarters. Manufacturing, which accounts for 11.1% of the economy, has been hit by an interest rate hike of 525 basis points from the Federal Reserve since March 2022.
Spending on durable goods has slowed after soaring during the COVID-19 pandemic, with services such as flights and visits to theme parks now preferred.
The ISM survey's new orders sub-index rose to 47.3 in July. That was the highest reading since October 2022 and up from 45.6 in June.
While higher borrowing costs continue to be a burden, the outlook for orders is improving as demand for goods continues, encouraging businesses to rebuild inventories. Factory and customer inventories remained low in July, which bodes well for future production.
Weak orders are constraining raw material prices. The survey's measure of prices paid by producers rose to 42.6 in July from 41.8 in June following significant improvements in the supply chain.
According to ISM, supplier delivery performance to production companies has been faster for 10 consecutive months. Goods disinflation helped ease price pressures in the economy, with annual inflation slowing sharply in June.
With orders still weak, factory jobs are shrinking. In June, ISM reported that companies "started to make layoffs to manage staff numbers, more than in previous months." This practice may have increased starting in July. The survey's measure of factory employment slipped to 44.4, the lowest reading since July 2020, from 48.1 in June.
However, it is not a reliable indicator of production employment in the government's non-agricultural wage count. Overall factory jobs likely rose by 5,000 jobs last month, according to a Reuters poll of economists. Total nonfarm payrolls are expected to increase by 200,000 jobs in July after increasing by 209,000 in June. The US Labor Department is scheduled to release its employment report for July on Friday.
On the other hand, US job openings fell to their lowest level in more than two years in June, but remained at levels consistent with tight labor market conditions despite a steep interest rate hike from the Federal Reserve to dampen demand.
Job openings, a measure of labor demand, fell 34,000 to 9.582 million in the month, the lowest level since April 2021, the Labor Department reported in its monthly Job Openings and Labor Turnover, or JOLTS, report on Tuesday.
The US dollar index continued to climb to a trading level of 102.115 with an increase of 0.47% after the release of ISM data.
