The U.S. manufacturing sector contracted last month, hitting its lowest level in eight months as the majority of industries reported declining activity, according to a new survey by the Institute for Supply Management (ISM).
Out of the 16 industries tracked by the index, 11 contracted in July, with only the remaining five reporting growth. Industries such as primary metals, plastics, machinery, electrical equipment, appliances, and transportation machinery saw a decline, while printing, furniture, and petroleum industries registered an increase.
“U.S. manufacturing activity entered deeper into contraction. Demand was weak again, output declined, and inputs stayed generally accommodative,” said Timothy R. Fiore, chair of the ISM manufacturing business survey committee.
Out of the six largest manufacturing sectors, only two saw an increase in new orders in July, he stated.
“Panelists’ comments noted a continued level of uncertainty and concern about a lack of new order activity, with confidence in the future economic environment reaching its lowest level since the coronavirus pandemic recovery,” he said.
None of the six largest manufacturing sectors reported an increase in production. Companies are hesitating to invest in inventory due to ongoing economic uncertainty, Fiore said.
Close to 60 percent said they expect their company’s overall sales to increase over the next year, according to the June survey. The majority also expect the level of exports to either increase or at least stay about the same during this period.
Interest Rates, Boosting Manufacturing
Fiore pointed out that many companies are displaying an unwillingness to invest in capital and inventory because of “current federal monetary policy and other conditions.”Keeping the rates as is for longer means companies have to continue paying higher interest for loans, creating financial difficulties for businesses.
Fed Chair Jerome Powell recently told lawmakers on Capitol Hill that higher interest rates for a longer period could “unduly weaken economic activity and employment.”
A more pressing concern for businesses could be rates being pushed up even more. Fed officials had said during the agency’s June meeting that this was a possibility if inflation kept rising or remained elevated.
The bank predicts U.S. manufacturing output to register higher growth in 2024 compared to last year, rising by 1.5 percent. Growth is expected to double next year to 3 percent, to eventually settle down to 2.5 percent the following year.
For instance, if a business buys commercial property, it can only depreciate it over 39 years. However, “a $1 investment in a nonresidential structure, depreciated over 39 years, has a present value of only $0.40,” he said.
“Allowing a business to recoup only 40 percent of its expenditures on nonresidential structures makes building new plants and fabs more costly than they would be under a neutral tax code.”