Manufacturing growth slowed in June and July, yet surprisingly good earnings reports from some major U.S. manufacturers provide new evidence that the sector can continue to lead the ongoing recovery.

Manufacturing has been a bright spot in the United States’ economy, yet the sector rebound that has been propelling the U.S. out of the downturn cooled in June and July.

While manufacturing activity continued to expand in July, marking the 12th consecutive month of growth, it is doing so at the slowest pace since last November, according to the Institute for Supply Management’s latest manufacturing ISM Report on Business, released Monday.

The ISM’s manufacturing index slipped to 55.5 in July from 56.2 in June. A reading above 50 indicates growth.

While manufacturing grew at a slightly slower monthly rate compared to June, the latest ISM report marks 12 consecutive months of growth in manufacturing, and indications are that demand is still quite strong in 10 of 18 industries.

Plastics and rubber products, paper products and electrical equipment and appliances were among the industries showing the strongest growth.

ISM’s new orders Index registered 53.5 percent in July, a 5 percentage-point drop from June. This is the 13th consecutive month of growth in the new orders index. ISM’s production index decreased 4.4 percentage points to 57 percent in July, compared with the June reading of 61.4 percent.

“Surprisingly, the ISM report suggests that manufacturers are planning to add more workers,” Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI, wrote in an analysis of the ISM report. “The increase in standard hours and overtime hours has allowed industrial firms to post strong growth without adding many workers; the ISM employment index indicates manufacturing firms plan to aggressively add people.”

“Employment, supplier deliveries and inventories improved during the month and reduced the impact of a month-over-month deceleration in new orders and production,” according to Norbert J. Ore, chair of ISM’s Manufacturing Business Committee. “The prices that manufacturers paid for their inputs were slightly higher but stable, with only a few items on the short supply list.”

Overall, manufacturing growth has slowed for the last three months, with the index dropping about 5 points from the 60.4 reading in April, which represented the fastest growth rate in six years.

Providing further evidence that the manufacturing recovery is slowing, a separate report from the U.S. Department of Commerce this week indicates that factory orders slumped in June.

New factory orders decreased for a second consecutive month, shrinking by $5.1 billion, or 1.2 percent. Shipments, also down two consecutive months, dropped $3.5 billion, or 0.8 percent, to $411.2 billion, according to the Commerce Department.

Nonetheless, a handful of surprisingly good earnings reports late last month “suggested that some of the major U.S. companies that make things and move them around — including Caterpillar, 3M and UPS — could lead the way to an economic recovery,” the Associated Press reports.

In fact, growing overseas demand and a pickup in business investment are boosting companies like Caterpillar Inc., which saw retail sales rise 22 percent in June. “The increase in overall sales of machinery and engines through dealers marks the second straight month that overall sales increased,” according to a separate AP report.

The heavy-machinery maker reported a stronger-than-expected quarterly profit and raised its full-year outlook, citing sales growth in emerging markets, especially from customers in mining and energy.

“Manufacturing activity is decelerating but the pace of growth is slowing from a rapid pace. Production activity remains relatively robust and is less driven by the inventory swing and rebound in big-ticket consumer goods. Production is now driven more by high tech, equipment investment and exports,” according to Meckstroth. “A reorientation of the U.S. economy more towards investment and exports is a positive direction.”

According to a series of new reports, the outlook among manufacturers has strengthened and conditions are likely to continue improving, positioning the manufacturing sector at the forefront of the general economic rebound.

See also: Manufacturing Outlook Strengthens in Q2

Resources

Manufacturing ISM Report on Business
Institute for Supply Management, Aug. 2, 2010

Production Activity Remains ‘Relatively Robust’
by Daniel J. Meckstroth
Manufacturers Alliance/MAPI, Aug. 2, 2010

Full Report on Manufacturers’ Shipments, Inventories and Orders – June 2010
U.S. Department of Commerce, Aug. 3, 2010

Hope for Economy in Strong Manufacturing Reports
by Christopher S. Rugaber and Alan Zibel
The Associated Press, July 22, 2010

Caterpillar’s June Retail Sales Up 22 Pct
The Associated Press, July 22, 2010