Manufacturing drops due to slower growth

ISM MANUFACTURING


The ISM manufacturing index moderated in July, but by less than forecasts, slowing to 55.5 from 56.2 in June.

The new orders index declined to 53.5 in July from 58.5 in June, however, employment growth picked up to 58.6 from 57.8. The production index pulled back to 57.0 from 61.4.

Construction spending was stronger than expected in June, rising 0.1%. However, May construction outlays were downwardly revised to -1.0% from an originally reported -0.2%. Over the last year, total construction spending has fallen 7.9%.


BOTTOM LINE

While the headline ISM index showed a smaller downshift in manufacturing growth in July than expected, the details of the report were less encouraging. In particular, the new orders index showed much slower growth in orders than we have seen thus far in the recovery and the report also showed a small rise in inventories (which is scored as adding to manufacturing activity in this report). Having noted this, however, we should also point out that a slowdown in order growth following a surge at the end of recessions was seen in the last three recoveries and, therefore, should be viewed as a sign of slower manufacturing growth and not as a sign of an impending double dip. Far more encouraging, however, is the increase in the employment component (the three-month average of ISM manufacturing employment is at its highest level since July 2004). The prices paid data show continued input price increases (though at a slower rate in June and July than earlier in the year) and do not support the view of growing deflationary pressures.

Construction spending added to second quarter growth as housing was boosted by the homebuyer tax credit and activity bounced from weather-depressed levels in the first quarter. However, this report has little by way of leading information. Of note, nonetheless, was the increase in government construction spending in June, which offset declines in private spending. Government construction outlays have risen at a 12.3% annualized pace since March (compared to a decline of 4.1% over the last year) and we may finally be seeing the impact of some of those shovel-ready projects that were supposed to boost the economy as a result of the February 2009 stimulus bill

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