Economy

ISM manufacturing index falls to 51.2 in July; construction spending down 1.3% in June

Key Points
  • The U.S. manufacturing sector expanded in July, but the pace of growth decelerated to its weakest in nearly three years stemming from a broad decline in activities from the month before, an industry report released on Thursday showed.
  • The Institute for Supply Management (ISM) said its index of national factory activity fell to 51.2, the lowest reading since August 2016.
  • U.S. construction spending fell by the most in seven month in June as investment in private construction projects tumbled to a more than 1.5-year low.
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July ISM manufacturing index misses expectations

U.S. manufacturing activity slowed to a near three-year low in July and a measure of new orders received by factories rebounded slightly, as the negative effects of a bitter trade war between the United States and China lingered.

Other data on Thursday showed the number of Americans filing for unemployment benefits rose last week, while construction spending fell in June as investment in private construction projects tumbled to its lowest level in 1-1/2 years.

The slowdown in factory activity and accompanying weak business investment have caught the attention of Federal Reserve officials. The U.S. central bank on Wednesday cut interest rates for the first time since 2008, to insure against downside risks to the economy from trade tensions and slowing global growth.

Fed Chairman Jerome Powell told reporters during a news conference the preemptive monetary policy easing was "not the beginning of a long series of rate cuts." Powell also noted that "the investment and manufacturing part of the economy is more or less not, it's not growing much."

"We hope to help that with this rate cut," he said.

The Institute for Supply Management (ISM) said its index of national factory activity slipped to 51.2 last month, the lowest reading since August 2016, from 51.7 in June. It was the fourth straight monthly decline in the index.

A reading above 50 indicates expansion in the manufacturing sector, which accounts for about 12 percent of the U.S. economy. Economists polled by Reuters had forecast the ISM index would rise to 52.0 in June.

The ISM said while businesses expressed less concern about the U.S.-China trade turbulence, "trade remains a significant issue."

Washington's trade fight with Beijing has hurt business sentiment. That, together with disruptions to supply chains caused by import tariffs, is weighing on manufacturing.

Manufacturing is also taking a hit from an inventory overhang, which has resulted in businesses placing fewer orders with manufacturers. A reduction in the production of Boeing's MAX 737 aircraft, which was grounded in March after two fatal plane crashes in five months, is also a drag on activity.

The ISM survey's new orders measure rebounded to a reading of 50.8 last month from 50.0 in June. A gauge of factory employment dropped to 51.7 from a reading of 54.5 in June.

The dollar firmed against a basket of currencies as investors continued to digest Wednesday's rate decision and Powell's comments. U.S. Treasury prices rose. Stocks on Wall Street were trading higher.

Labor market resilient

In a separate report on Thursday, the Labor Department said initial claims for state unemployment benefits rose 8,000 to a seasonally adjusted 215,000 for the week ended July 27. Economists had forecast claims increasing to 214,000 in the latest week.

The labor market has remained resilient even as the economy has shifted into lower gear, mainly as the stimulus from last year's $1.5 trillion tax cut package fades. The health of the labor market, which so far does not appear to have been impacted by the U.S-China trade fight could help to determine whether the Federal Reserve will cut interest rates again this year.

The four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, fell 1,750 to 211,500 last week.

The claims data has no bearing on July's employment report, which is scheduled to be released on Friday. According to a Reuters survey of economists, nonfarm payrolls likely increased by 164,000 jobs in July after surging by 224,000 in June.

Job gains averaged 172,000 per month in the first half of this year, below the monthly average of 223,000 in 2018, mainly because of a shortage of qualified workers.

The pace of job gains, however, remains above the roughly 100,000 per month needed to keep up with growth in the working-age population. The unemployment rate is expected to have held steady at 3.7% in July.

"The trend in job growth likely has slowed to some degree," said Daniel Silver, an economist at JPMorgan in New York. "But the claims data signal that any softening in the labor market is likely to be modest and don't point to any sort of substantial downshift in activity."

In a third report on Thursday, the Commerce Department said construction spending dropped 1.3% in June, the biggest decline in seven months, after falling 0.5% in May.

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