PMI Signals Slowest Manufacturing Expansion Since December 2010

July 25, 2012 /

The July Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) indicated the weakest improvement in U.S. manufacturing sector business conditions in 19 months, according to the preliminary ‘flash’ reading which is based on around 85% of usual monthly replies.

At 51.8, down from 52.5 in June, the headline index was the second-lowest since the manufacturing recovery was first signalled by the PMI in late-2009 (only
December 2010 saw a weaker PMI reading).

PMI index readings above 50.0 signal an increase or improvement on the prior month, while readings below 50.0 indicate a decrease. Manufacturing output increased in July, rising for the thirty-fourth consecutive month. However,
production rose only modestly, with the rate of growth slowing for a fourth successive month to a 12-month low.

The volume of new orders received by manufacturers also increased in July, continuing the trend that has been recorded in each month since September 2009. The rise in total new work generally reflected greater domestic demand, as new export orders fell for the second month running, registering the second-largest monthly decline since September 2009.

Backlogs of work declined for the second consecutive month in July, dropping at the fastest rate in almost three years, making manufacturers take a cautious approach to hiring. Although the survey signalled an increase in payroll numbers in July, the rate of job creation was broadly unchanged from the 18-month low seen in June.

Input costs showed the largest monthly fall since June 2009, dropping for the second successive month. Firms reported lower prices for oil, gas and raw materials such as aluminium and steel. Lower raw material costs provided some leeway for manufacturers to reduce their selling prices during July. Output prices declined for the second consecutive month, albeit to a lesser extent than in June.

Stocks of both purchases and finished goods increased in July. Most notably, stocks of finished goods were accumulated at the strongest rate since data collection began in May 2007, pushing the forward-looking new orders to inventory ratio to its lowest since May 2009. The fall in the ratio suggests that companies may start to cut output in coming months unless stock levels are reduced via stronger sales.

Suppliers’ delivery times lengthened in July, but the latest deterioration in vendor performance was only marginal and the weakest in 37 months. Fewer supply chain delays are a sign of suppliers being less busy.

Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said: “The U.S. manufacturing sector is clearly struggling under the pressure from falling exports, which showed the first back-to-back monthly decline for almost three years in July. Growth of production is slowing closer to stagnation as a result, and rising levels of unsold stock may mean companies seek to scale back production in coming months unless demand picks up again.

“Reassuringly, domestic demand appears to be showing ongoing signs of resilience, encouraging firms to take on more staff.

“Overall, the third quarter is so far shaping up to be worse than the second quarter in terms of growth, which is a growing concern for policymakers. Some
comfort can be drawn from the fall in prices, which should help keep inflation at bay and increase the scope for further stimulus. However, falling prices are also a worrying sign of just how much demand has weakened in recent weeks.”

 

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