Manufacturing Sector Contracts for Second Month

U.S. manufacturing contracted for the second consecutive month in July, deepening concerns about the stability of the manufacturing rebound and reflecting a broader slowdown in the global economy.

Business activity in the United States manufacturing sector decreased in July, marking the second consecutive month of contraction following a three-year period of continuous growth. Although the decline slowed slightly last month, the ongoing contraction raises concerns about the strength of the manufacturing rebound and the overall stability of the U.S. economic outlook for the future.

According to the Institute for Supply Management's (ISM) latest manufacturing Report on Business, U.S. manufacturing shrank for the second straight month in July, while the overall economy grew for the 38th consecutive month.

The ISM purchasing managers' index (PMI), a key monthly gauge of the factory sector, rose to 49.8 last month, up from 49.7 in June, which marked the first monthly contraction since July 2009. Readings below 50 indicate overall contraction for the industry, meaning that manufacturing activity continued to decline through July, albeit at a slower pace. The latest PMI reading was well-below the 12-month average of 52.5.

"The ISM report came as another worrying sign following last month's surprisingly low number, which ended a 34-month growth streak. Manufacturing had been one segment in the U.S. economy that, until last month, shown consistent growth during the recovery," CNNMoney reports. "But this month's report won't alleviate concerns about slowing global growth and the Eurozone crisis dragging the sector down. Poor numbers out of Asia and Europe on Wednesday showed that the ripple effect from Europe has hit manufacturing across the globe."

The July reading came as a surprise, as economists expected manufacturing to recover from the decline in June and return to growth. Experts polled by Reuters had forecast the PMI to grow to 50.2 for the month.

Demand improved somewhat, with ISM's new orders index inching up to 48 in July, up from 47.8 in June though still in contraction. This marked the second time new orders have declined since April 2009.

The steepest decline last month was in the manufacturing labor market. The employment index fell to 52 from 56.6 in June, as heightened uncertainty has led many companies to scale back their plans for hiring more workers. The U.S. economy added 11,000 new manufacturing jobs in July, down from 12,000 in June.

Exports also decreased to 46.5 from 47.5 the prior month, imports dropped to 50.5 from 53.5 and supplier deliveries edged down to 48.7 from 48.9 in June.

Meanwhile, production climbed to 51.3 in July from 51 in June, inventories increased to 49 from 44 and prices rose to 39.5 from 37, the third consecutive month raw materials prices have fallen since December 2011.

"After an extremely strong start to 2012, the manufacturing sector has braked to nearly a complete stop this summer... Manufacturers cannot escape the limits imposed by the general economy, i.e., wage and salary growth is meager, job growth is weak and many consumers cannot get credit to spend more than they earn," Daniel J. Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), said. "MAPI does not believe the U.S. economy or the manufacturing sector will drop into recession; however, we forecast only a relatively modest growth rate for the rest of this year and into the first half of 2013."

Eleven of the 18 industries tracked by ISM reported contraction last month: nonmetallic mineral products; apparel, leather and allied products; wood products; textile mills; miscellaneous manufacturing; chemical products; transportation equipment; printing and related support activities; paper products; machinery; and computer and electronic products.

Only seven industries posted growth last month: plastics and rubber products; electrical equipment, appliances and components; primary metals; petroleum and coal products; fabricated metal products; food, beverage and tobacco products; and furniture and related products.

Volatility in international markets continues to have a negative effect on industries worldwide, with Eurozone manufacturing contracting for the 11th consecutive month in July and China's manufacturing activity dropping to an eight-month low.

"Manufacturers from China to the euro area joined the U.S. in showing signs of retrenching, indicating Europe's debt crisis and the looming U.S. government spending cuts and tax increases that constitute the so-called fiscal cliff are taking a toll on customers globally," Bloomberg News notes. "Federal Reserve policy makers today acknowledged that the economy has slowed and foreshadowed new steps to boost the weakening expansion."


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