Tariffs, Slowing Sector Growth Headline July 2018 Manufacturing ISM Report On Business

While the United States economy remains strong and growing in its 111th consecutive month, the Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers Index (PMI) shows creeping concerns in how the manufacturing industry will weather an uncertain landscape in the near future. Although the manufacturing sector continued its expansion last month, remarks from industry executives point to tariffs and the rising costs of raw materials as a prime source of trepidation.

“Steel cost increases are causing a lot of negotiations. The increases are real and will affect costs beginning in the third quarter of 2018. (Electrical Equipment, Appliances & Components)”

“The steel tariffs are a concern to us. We have already seen steel prices increase due to the threat of the tariffs and are seeing kickback from our customers due to the higher prices. We are concerned that the end customer will go to off shore to purchase the finished product. (Fabricated Metal Products)”

Struggles surrounding tariffs began to creep into manufacturing industry data in July. Percentage point changes are down in the majority of categories, which has led to many manufacturers taking conservative measures. Some of the crucial numbers from the July 2018 Manufacturing ISM Report On Business include:

  • The overall PMI index itself has dropped from 60.2% in June 2018 to 58.1% in July, a 2.1% fall. Though in its 23rd consecutive month of growth, that growth is now slower.
  • New Orders and Production have both fallen as well, almost in tandem. The New Orders index was down 3.3% while Production dropped 3.8% over the last month. These new figures, at 60.2% and 58.5%, respectively, help maintain the overall sector growth but, again, point to a verifiable cooling-off within the industry.
  • Perhaps the two most worrisome figures from the report are Supplier Deliveries and Prices. The Supplier Deliveries index, now at a still-high 62.1%, declined 6.1% while Prices, which, although the index remains at a high 73.2% and increasing, registered a 3.6% reduction in the July report.

Among these concerning figures, a couple bright spots have manufacturing professionals optimistic about the future despite tariffs.

  • Manufacturing Employment is continuing to grow at a faster rate. Employment in July 2018 was up 0.5%, continuing the 22-month positive trend.
  • As manufacturers seek to get ahead of tariffs, Inventories are also growing. Inventories were up 2.5% in July, marking the index’s 7th consecutive month of growth. Industry leaders attribute this to evasive maneuvers in the face of rising costs. According to respondents from the Computer and Electronic Products manufacturing sector, “Global demand is still strong. Working on contingency plans for the Chinese tariffs. We will probably onshore most of that material.”

From a 12-month perspective, the state of the manufacturing industry remains relatively status quo, falling just shy of the trailing average index mark of 59.1%. In the coming months, all eyes will be on escalating tariffs, which will likely define trends over the third quarter of the fiscal year. Rising costs and associated production issues could also exacerbate slowing trends. However, an ease on trade hostilities could give the manufacturing PMI a bump toward an even more positive direction if material prices even out and cost-efficient production resumes.

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