US Sees Slowest Manufacturing Expansion in 3 Years

August 03, 2012 /

Growth of the U.S. manufacturing sector slowed to its weakest pace in nearly three years in July, according to the final Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™).

At 51.4, down from the flash estimate of 51.8 and below June’s reading of 52.5, the PMI hit a 34-month low and signalled only a modest expansion in July. PMI index readings above 50.0 signal an increase or improvement on the prior month, while readings below 50.0 indicate a decrease.

Higher production levels were reported by manufacturers in July, continuing the trend that has been registered in each month since October 2009. However, the rate of output growth slowed for the fourth month running to its slowest in a year.

The volume of new orders received by manufacturers also increased in July. The increase in total new work largely came from the domestic market, however, as new export orders fell for the second consecutive month, partly reflecting the ongoing economic crisis in Europe.

Overall, new orders (both domestic and exports) rose only modestly, with the rate of increase weaker than the earlier flash estimate and the second-slowest since orders began rising almost three years ago.

Producers of intermediate goods (suppliers of components to other manufacturers) saw the strongest rise in new orders. However, the increase was only modest and the weakest since February.

Manufacturers of investment goods saw new order growth broadly stagnate over the month, while producers of consumer goods reported the first fall in new work intakes in a year-and-a-half. Employment in the manufacturing sector increased in July, taking the current sequence of job creation to 30 months.

The monthly rise in staffing levels was largely unchanged from the 18-month low recorded for June.

Inflationary pressures continued to dissipate during July, with both input costs and output prices falling for the second month running. The reduction in average input prices, though weaker than that estimated by flash data, was solid and greater than in June.

Lower raw materials prices were especially commonly reported for aluminium, steel and resin. Meanwhile, average prices charged by firms fell solidly in July. While some companies reduced their output charges in a bid to remain competitive, other respondents commented on passing lower cost burdens on to clients.

Finally, weakening levels of manufacturing activity were further indicated by slower growth of purchasing activity and the smallest lengthening of suppliers’ delivery times since June 2009.

So far this year, as in 2010 and 2011, larger companies (those with over 500 employees) have led the overall manufacturing expansion in terms of output, order book growth and employment on average. Larger firms have also seen the strongest export performance on average.

Smaller firms, employing less than 100 people, have in contrast seen the weakest growth of output, employment and orders so far this year. That said, the divergences between the different firm size groupings have narrowed in recent months.

Chris Williamson, Chief Economist at Markit said: “The final reading of Markit’s U.S. Manufacturing PMI was even weaker than the flash estimate, indicating that manufacturers are currently reporting the weakest growth since September 2009.

“Producers are being hit by the ongoing euro zone crisis, slower global economic growth and increasing unease about demand in the home market as elections loom closer and uncertainty hangs over fiscal and monetary policies.

“With order books barely growing in July as export orders fell for the second month in a row, the survey signals a real risk of manufacturing production falling in the third quarter unless demand picks up soon.

“Firms continued to take on extra staff, but hiring is nothing like as widespread as earlier in the year. Companies are clearly taking a cautious approach to recruitment and the job market will most likely remain
subdued until global economic uncertainty begins to lift. Any worsening of the business environment will
raise the risk of the labour market recovery moving into reverse.”


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