U.S. Manufacturing Expansion Slows, but Less Than Expected

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factory manufacturingU.S. factory activity slowed in July, according to the Institute for Supply Management, but the decline was less than economists had expected. The manufacturing index dipped to 55.5, from a revised 56.2 in June. A Bloomberg survey had expected the manufacturing index to dip to 54.0. The index was at 59.7 in May and 60.4 in April.

Two key components of the index -- employment and prices paid -- rose in July. The month also marked the 12th consecutive month manufacturing activity has expanded. Readings above 50 indicate an expansion; under 50, a contraction.

Factories Still Hiring

In July, the employment component rose to 58.6 in July from 57.8 in June -- an increase that indicates that the roughly half-year trend of job growth in the nation's manufacturing sector continued this summer.

Also, the prices component inched slightly higher to 57.5 in July from 57.0 in June. Although the prices gain was small, the fact that it rose suggests price softness is limited -- an encouraging development, given economists' growing concern about deflation.

In addition, the closely watched new orders component slumped to 53.5 in July from 58.5, but the component fell less than expected and remains above the key 50 expansion/contraction demarcation line. This suggests a continued increase in demand in the pipeline.

A Slightly Slower Factory Expansion

Norbert J. Ore, chairman of the ISM's Manufacturing Business Survey Committee, said the expansion continued in the nation's factory sector this summer, albeit at a slightly slower pace.

"Manufacturing continued to grow during July, but at a slightly slower rate than in June. Employment, supplier deliveries and inventories improved during the month and reduced the impact of a month-over-month deceleration in new orders and production," Ore said in a statement. He added, "July marks 12 consecutive months of growth in manufacturing, and indications are that demand is still quite strong in 10 of 18 industries. The prices that manufacturers paid for their inputs were slightly higher but stable, with only a few items on the short supply list."

Respondents to the ISM's July survey confirmed an ongoing manufacturing expansion, but one that also shows that conditions have cooled slightly.

"Business in July was strong, the best month since October" (fabricated metal products sector). "Slow economy has killed sales for new equipment orders (machinery sector). "Business continues to be sluggish and has fallen slightly as the economic ills continue" (non-metallic mineral products sector).

After July's less-than-expected dip in the manufacturing index, the most compelling stats in the July report are the readings for employment and prices paid. The employment component points to continued hiring by the nation's factories -- which is good news for a U.S. economy that needs all of the new jobs it can get. Further, the rise in the prices component indicates, at least as of this summer, that pricing power remains adequate in the factory sector -- a welcome sight for a nation trying to avoid deflation.
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