July manufacturing activity at highest level since June 2011, says ISM

Manufacturing activity in July continued its solid turnaround since dropping to its lowest levels since June 2009 in May, according to the Institute for Supply Management’s monthly Manufacturing ISM Report on Business.

The PMI, the index used by the ISM to measure manufacturing activity, hit 55.4 in July, which is 4.5 percent higher than June’s 50.9 and is the highest PMI level since coming in at 55.8 in June 2011. The July PMI is ahead of the 12-month average of 51.6 and has been over 50 in seven of the last eight months.

Economic activity in the manufacturing sector had expanded for 34 straight months prior to contraction in June 2012, and overall economic activity has now expanded for 50 straight months and six times in the first seven months of 2013, according to ISM.

New Orders, which are often referred to as the engine that drives manufacturing, followed a 3.1 percent increase in June with a 6.4 percent increase in July to 58.3. The ISM said that this increase is the highest for the index going back to April 2011, when it checked in at 63.8. And Production—at 65.0—was up 11.6 percent over June’s 53.4 and stands as the highest reading since May 2004’s 65.3, according to the ISM. Employment rose 5.7 percent from June to 54.4.

“The New Orders growth was strong and broad-based with various industries growing in July,” said Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, in an interview. “Production was also very good, but it cannot be sustained at that level so it is a factor of growth in new orders and working off of the backlog of orders (down 1.5 percent in July to 45.0) and putting the petal to the metal for the month.”

Looking ahead to the rest of the year, Holcomb said July’s numbers serve as a strong leaping off point, adding that the ISM’s semiannual report issued in April called for the same, making July consistent with that.

What’s more, he added there were no broad economic signs that suggest otherwise at this point.

In the respondents’ comments section of the report, the underlying theme regarding economy was mostly optimistic. A furniture and related products respondent said that sales are holding steady and business is good, and a paper products respondent noted that overall conditions remain steady and slightly above prior year.

July Prices fell 3.5 percent to 49.0. Holcomb noted that while manufacturers like lower prices, it is not preferred for an extended period, making July a surprise in that regard and adding it would not be surprising to see it top 50 next month. If prices stay too low for too long, he said it is a reflection of soft overall demand, which is the antithesis of the current environment.

Inventories in July fell 3.5 percent to 47.0. This decrease, though, is more of a byproduct of heavy production and new order activity, explained Holcomb.