U.S. Manufacturing Activity Expands to 18-Month High

By Barbara Jorgensenby

U.S. manufacturing activity in July expanded to its highest level in nearly 18 months as orders and production rose despite a resurgence in global Covid-19 cases. The Institute for Supply Management’s factory index, the PMI, increased by 1.6 percent in July to 54.2. Any reading above 50 indicates expansion.

New orders reached 61.5 percent, up 5.1 percent from June. Production registered 62.1, an increase 4.8 percent. Although those indexes were coming off a relatively low base in June, they were stronger than expected in July.

“We saw factories reopen in May, and I think we’ve figured out how to deal with the Covid outbreak,” said Tim Fiore, chair of the ISM’s manufacturing survey committee. “At first, you’d have a positive test; you’d have to shut down and clean, and then reopen,” he explained. “That isn’t happening now.”

Employment, however, is well below 50 at 44.3 percent, a 2.2 percent uptick from June. About 35 percent of U.S. manufacturing companies reported they were trimming headcount while an equal number said they were adding employees. “That’s a pretty good balance, considering companies do see attrition and many have no-hire policies,” Fiore said.

The computer and electronics sector did not perform as well in July as in prior months, the ISM reports, but manufacturers remain positive for the rest of the year. “The manufacturing outlook has improved greatly since June, as business has resumed at nearly 100 percent,” said one tech executive. “We have implemented a number of safeguards that are costing extra money, but we are running.” Overall, July’s survey recorded two positive comments for every one cautious opinion.

July’s performance rested largely on demand, which was positive across the board. Both imports and exports moved into expansion territory from contraction. Customers’ inventories remained at a level considered a positive for future production, and order backlog returned to expansion for the first time in five months.

Consumption (measured by the production and employment indexes) contributed positively (a combined 7-percentage point increase) to the PMI calculation, with industries continuing to expand output after May’s return-to-work actions.

Inputs — expressed as supplier deliveries, inventories and imports — weakened for the third straight month, due to supplier delivery issues abating and import levels re-entering expansion. Inventory levels contracted due to strong production output, supplier delivery difficulties and inventory minimization. Inputs contributed negatively (a combined 4.6-percentage point decrease) to the PMI calculation but were more than offset by the demand and consumption improvement, as was the case in June. Prices remained in expansion, supporting a positive outlook.

Several major U.S. industries continue to struggle in the global economy. An executive in the petroleum sector said uncertainty “regarding our industry and business has not improved. We are developing the 2021 budget around multiple scenarios.” In transportation equipment, one manager reported business down almost 70 percent and the company expects to lay off 30 percent of its workforce until September or October.

However, the chemical products sector grew in July, and the ISM expects U.S manufacturing expansion to continue through August and possibly through the end of the year. The fall portends a lot of disruptive geopolitical activity, Fiore pointed out. “There’s concern over the virus, and of course the election. Trade issues will continue. In fact, trade issues will resurface as the WTO will likely rule in favor of Airbus, and we’ll see the U.S. retaliate.”

In 2004 the U.S. lodged a WTO case against the EU for its member state support to Airbus. In 2011 the WTO found the EU illegally funneled money to Airbus and issued a similar ruling — prompted by an EU suit — against the U.S. and Boeing in 2012. The dispute has continued and in 2019 the WTO authorized the U.S. to retaliate with tariffs against $7.5 billion worth of EU exports. Due to a timing lag, the WTO won’t issue a retaliation award in the EU’s complaint about Boeing until sometime this fall.

“Nobody is investing,” Fiore added, “and China will remain a long-lasting issue even when the virus is gone.”

The U.S. most recently has tightened semiconductor-equipment exports to China and continues to ban U.S. tech sales to Chinese network giant Huawei.