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Fundamental Analysis

U.S. Manufacturing Decelerates in July, But Remains Well in Expansionary Territory


The Institute for Supply Management (ISM) manufacturing index edged down to 56.3 in July, from 57.8 in June. This was a hair below consensus expectations for 56.4.

Most subcomponents were lower on the month, with the exception of inventories which edged up to 50.0 (from 49.0).

In general, most subcomponents indicate healthy growth in activity. Production and new orders both edged down to 60.2 (from 62.4) and 60.4 (from 63.5), respectively. The employment sub-index pulled back 2 points, but at 55.2 remains well in expansionary territory. 

Export orders moved down 2 points, while the imports subindex moved up by the same amount. Still, both remain in the 56 to 58 range, indicating healthy growth in international shipments. 

Prices paid bucked the downward trend, moving up strongly to 62.0 (from 55.0 in June).

The spread between new orders and inventories pulled back a little, but at 10.6 remains supportive of future growth in the sector. This notion was also corroborated by 15 of the 18 manufacturing industries reporting growth this month, while only petroleum, apparel and textiles reporting contraction.

Key Implications

The U.S. manufacturing sector continues to show healthy growth. The slight deceleration in July is not surprising, following on the heels of June's strong performance.

A rebounding global economy, a relatively steady oil price, and the lower U.S. dollar should continue to support U.S. manufacturing. Assuming a relatively stable political backdrop and little disruption on the trade front, there is little reason not to remain optimistic about manufacturing's prospects. This is corroborated by the forward looking indicators in today's ISM report and relatively optimistic industry views.

The uptick in the price sub-index is a welcome development and should provide some evidence for the Fed that the recent slowdown in inflation will prove transitory.

Author: TD Bank Financial Group Website:
TD Bank Financial Group
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.
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