KEY POINTS OF ISM MANUFACTURING:
- July manufacturing PMI rises to 52.8 from 53.00 in June, beating expectations calling for a drop to 52.00
- Slowing factory activity suggests U.S. economy continues to lose momentum
- Prices paid reservoirs, signaling that inflationary pressures could cool
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An indicator of US factory activity cooled less than expected in July, but kept slowing downwhose growth rate is the weakest in more than two years, a sign that the economic outlook continues to deteriorate in a context of galloping inflationary pressures and an increasingly restrictive monetary policy following several rate hikes interest rates anticipated by the Federal Reserve.
According to the Institute for Supply Management (ISM), the July manufacturing PMI fell to 52.8 from 53.00 in June, reaching its lowest level since June 2020 while the economy was still recovering from the COVID-19 crisis. Analysts polled by Bloomberg News had expected the headline index to fall to 52.00, but remain in expansion territory. For context, any reading above 50 indicates growth, while readings below this level indicate contraction in production.
Looking at the performance of some of the components of the survey, the goods-producing sector was held back by a drop in the forward-looking index index of new orders, which fell slightly to 48.0 from 49.2. Skyrocketing inflation erodes purchasing power, prompting households to cut back on discretionary spending. This, coupled with high inventories in many industries, may contribute to a weaker demand profile.
Among so many bad news, there was a bright spot in the ISM report. The prices paid index plunged 18.5 points to 60.0, the fourth biggest drop ever, signaling that commodity prices, while still high, are rising at a much slower pace than in previous months. The easing in input costs, if sustained, could translate into lower CPI numbers over the next few months, paving the way for the Fed to adopt less hawkish policy this fall. .
Taken together, today’s data may heighten fears that the US is heading into a recession, but not imminently. While this scenario could heighten market anxiety and trigger bouts of violent and unpredictable volatility, moderate cost burdens for American companies could compensate for excessive pessimism; after all, the likelihood of a downturn, as well as benign developments on the inflation frontcan give the Fed the perfect excuse to pivot.
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—Written by Diego Colman, Market Strategist for DailyFX