U.S. manufacturing continued to grow in July, though the pace slowed for the second straight month as spending rotates back to services from goods and shortages of raw materials persist.
The Institute for Supply Management (ISM) said on Monday its index of national factory activity fell to 59.5 last month, the lowest reading since January, from 60.6 in June.
A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the U.S. economy. Economists polled by Reuters had forecast the index little changed at 60.9.
Nearly half of the population has been fully vaccinated against COVID-19, allowing Americans to travel, frequent restaurants, visit casinos and attend sporting events among services-related activities that were curbed early in the pandemic.
Government data last week showed spending on services accelerated sharply in the second quarter, helping to lift the level of gross domestic product above its peak in the fourth quarter of 2019.
Though spending on goods remains strong, the pace is cooling because of the back in vogue services as well as shortages of long-lasting manufactured goods such as motor vehicles and some household appliances. A global shortage of semiconductors is weighing on the production of motor vehicles.
The ISM survey’s forward-looking new orders sub-index fell to a reading of 64.9 last month from 66.0 in June. That was the second straight monthly decline. But with inventories at factories remaining lean and business warehouses almost empty, the moderation in new orders growth is likely to reverse or remain minimal.
Businesses depleted inventories at a rapid clip in the second quarter. Stocks at retailers are well below normal levels. Economists at Goldman Sachs expect retail and auto inventories will return back to normal levels in mid-2022.
Production at factories slowed last month, leading to a rise in the backlog of uncompleted work.
There was some encouraging news on inflation. The ISM survey’s measure of prices paid by manufacturers fell to a reading of 85.7 last month from a record 92.1 in June. The drop – the largest pullback in the index since March 2020 – supports Federal Reserve Chair Jerome Powell’s contention that inflation will moderate as supply constraints abate.
The Fed’s preferred inflation measure, the personal consumption expenditures price index, excluding the volatile food and energy components, shot up 3.5% year-on-year in June, the largest gain since December 1991.
Manufacturers also hired more workers in July. A measure of factory employment rebounded after contracting modestly in June for the first time since November. The rebound is a good omen for July’s employment report.
The economy is facing a shortage of workers, with a record 9.2 million job openings at the end of May. About 9.5 million people are officially unemployed.
Lack of affordable child care and fears of contracting the coronavirus have been blamed for keeping workers, mostly women, at home. There have also been pandemic-related retirements as well as career changes. Republicans and business groups have blamed enhanced unemployment benefits, including a $300 weekly check from the federal government, for the labor crunch.
While more than 20 states led by Republican governors have ended these federal benefits before they were scheduled to run out in early September, there has been little evidence that the terminations boosted hiring.
The labor shortage is expected to ease in the fall when schools reopen for in-person learning, but a resurgence in new COVID-19 cases, driven by the Delta variant of the coronavirus, could see some people reluctant to return to the labor force.