US manufacturing slows modestly

US manufacturing activity slowed less than expected in July and there were signs that supply constraints are easing, with a measure of prices paid for inputs by factories falling to a two-year low, suggesting inflation has probably peaked.

While the Institute for Supply Management survey on Monday showed a measure of factor employment contracting for a third straight month, Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, noted that "companies continue to hire at strong rates, with few indications of layoffs, hiring freezes or headcount reduction through attrition."

The better-than-expected ISM reading suggested that the economy was not in recession despite a decline in gross domestic product in the first half of the year. Businesses, however, are sitting on excess inventories after ordering too many goods because of worries about shortages, depressing new orders.

"The post-pandemic inventory restocking cycle is winding down amid softening consumer goods demand," said Pooja Sriram, an economist at Barclays in New York.

"This intensifies risks of a harder landing in the manufacturing sector later this year. That said, the overall PMI would still need to decline a fair bit to reach readings consistent with outright economic recession."

The ISM's index of national factory activity dipped to 52.8 last month, the lowest reading since June 2020, when the sector was pulling out of a pandemic-induced slump. The PMI was at 53.0 in June. A reading above 50 indicates expansion in manufacturing, which accounts for 11.9 per cent of the US economy.

Economists polled by Reuters had forecast the index would fall to 52.0. A reading above 48.7 over a period of time generally indicates an expansion of the overall economy.

Four of the six biggest manufacturing industries - petroleum and coal products as well as computer and electronic products, transportation equipment and machinery - reported moderate-to-strong growth last month.

High inflation remained a complaint among businesses even though overall price increases for inputs have started slowing considerably. Makers of chemical products said inflation is "slowing down business," and also noted an "overstock of raw materials due to prior supply chain issues and slowing orders."

Manufacturers of food products reported that "many customers appear to be pulling back on orders in an effort to reduce inventories." Textile mill operators said "continuing delivery and staffing issues have eaten away the bottom line."

The ISM survey's forward-looking new orders sub-index dropped to 48.0 from a reading of 49.2 in June. It was the second straight monthly contraction. Combined with a steady reduction in order backlogs, that suggests a further slowdown in manufacturing in the months ahead.

Many retailers, including Walmart, have reported carrying excess inventory as soaring inflation forces consumers to spend more on low-margin food products instead of apparel and other general merchandise.