U.S. Manufacturers Report Third Straight Month of Contraction for July 2012

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--If three data points make a trend, U.S. manufacturers are in a negative trend, with scant reason for optimism in the near term. Manufacturing has been one of the few sectors of the economy that has grown meaningfully since the Great Recession officially ended in June 2009. But the latest monthly report from the Institute for Supply Management (ISM) (Tempe, Arizona) shows a contracting manufacturing sector as purchasing managers respond to a still anemic U.S. economy and a slowdown of overseas demand.

Click on icon to show monthly manufacturing job gains and losses over the last 12 months.

But Dave Pickering, Industrial Info's vice president of research for Industrial Manufacturing, had a different perspective on the industrial economy. "If anything, we're seeing manufacturing go in the opposite direction. Durable goods orders are up. There have been large aircraft orders placed recently that have bolstered the durable goods reports. The automotive sector is chugging along. Auto sales are strong. Capital and maintenance project spending for carmakers is nearly back to pre-recession levels."

Prior to the Great Recession, the auto industry spent about $10 billion per year on capital and maintenance projects, he said in an interview. During the Great Recession, spending fell to about $3 billion per year. But this year, Pickering said he expects automakers to spend $8 billion to $9 billion on capital and maintenance projects.

Speaking about a broad range of factors in the industrial manufacturing segment, Pickering said he sees the glass as half-full: "We're seeing continued growth. It's not gangbusters, but there's nothing wrong with modest and steady growth."

The ISM's August purchasing manager's index (PMI) report, released September 4, paints a gloomier picture. It showed manufacturing contracted for the third month in a row, slipping to a reading of 49.6 in August from its July reading of 49.8. A score below 50 indicates a contracting industrial economy. Over the last 12 months, the PMI has ranged from a high of 54.8 to a low of 49.6, averaging 52.2, the ISM said. The PMI first started showing a contraction among manufacturers this past June. The August reading of 49.6 is the lowest PMI score since July 2009, ISM added.

Other data tracked by the ISM showed similar declines in August:

• The New Orders Index registered 47.1%, a decrease of 0.9 percentage points from July, indicating contraction in new orders for the third consecutive month.
• The Production Index registered 47.2%, a decrease of 4.1 percentage points and indicating contraction in production for the first time since May 2009.
• The Employment Index remained positive at 51.6%, but that reading was the lowest since November 2009, when the Employment Index registered 51%.
• The Prices Index increased 14.5 percentage points from its July reading to 54%.
• The Inventories Index registered 53% in August, which is 4 percentage points higher than the 49% reported in July. This month's reading indicates that respondents are reporting inventories are growing for the first time since September 2011, when the Inventories Index registered 52%.

"Comments from the (PMI) panel generally reflect a slowdown in orders and demand, with continuing concern over the uncertain state of global economies," said Bradley J. Holcomb, chair of the ISM's Manufacturing Business Survey Committee.

Comments from some members of the institute's business survey panel showed weakening economic conditions:

• "Lackluster demand continues in all regions of the world, and is supporting much lower raw materials prices in the second half of 2012." (Chemical Products industry)
• "Internal indicators and feedback from sales channels are indicating a slowdown in demand for capital equipment." (Machinery industry)
• "Business is slow right now. Companies seem to be holding onto their money." (Computer & Electronic Products industry)
• "We can sense, feel and see headwinds with customer orders, especially Europe-related." (Apparel, Leather & Allied Products industry)

But other panel members made comments suggesting the glass is half full:

• "Incoming orders have slowed somewhat, but indications are that there will be a stronger fourth quarter." (Plastics & Rubber Products industry)
• "Business continues to be very solid, but there is now a slowing of incoming orders." (Fabricated Metal Products industry)

U.S. manufacturers created about 202,000 new jobs between August 2011 and July 2012, according to the U.S. Labor Department. The department's next monthly report, which is due this Friday, will show whether manufacturers added or shed jobs in August. Between January 2010 and July 2012, U.S. manufacturers created an estimated 525,000 new jobs. If manufacturers are experiencing deteriorating conditions, that could darken one of the few bright spots in the U.S. economy.

Eight manufacturing industries tracked by ISM said they shrank last month, including Textile Mills, Nonmetallic Mineral Products, Furniture & Related Products Computer & Electronic Products, Transportation Equipment, Machinery and Fabricated Metal Products. But eight other industrial segments reported growth last month, including: Primary Metals, Food, Beverage & Tobacco Products, Petroleum & Coal Products, Paper Products, Chemical Products and Miscellaneous Manufacturing.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.