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The ISM manufacturing index hit the lowest point since August 2016 in July, dropping to 51.2 vs. 52 expected. Factory activity has now seen four straight months of downturn and is nearing contraction.

Key Takeaways

• The Institute for Supply Management reported a drop to 51.2 in its national factory activity index for July.
• Market expectations for a mild uptick did not come to be, with declines now seen in July in other areas such as construction spending and private construction projects.
• A separate factory index from IHS Markit came in at 50.4 for July, the lowest point in almost ten years.

The ISM manufacturing index has hit an unexpected low as the industry continues to feel the effects of the ongoing trade conflict between China and the US. With tariffs placed on many goods, manufacturing activity has now decelerated to the lowest pace of growth in nearly three years. At 51.2, the ISM index is only slightly above negative territory.

With the manufacturing index, the employment index dropped from 54.5 to 51.7. The prices index fell from 47.9 to 45.1, and the index for new orders rose slightly from 50, a reading indicating no growth, to 50.8. The production index also came in at 50.8.

While manufacturing accounts for 11% of the US economy directly, it also impacts many other areas. Weak manufacturing activity can discourage company investment and limit hiring in the services industry. Construction spending hit a 7-month low with private construction sinking to a 1.5-year low in July.

The latest results for factory activity mark the fourth consecutive month of downturn in the US, which is fairly consistent with similar reports in other countries. A general economic slowdown being felt worldwide as well as punitive trade policies have made for turbulent times in the  manufacturing industry.

First Cut: ISM Manufacturing Index holds on to narrow expansion in July. https://t.co/LsSiaNPdgm pic.twitter.com/iyU61hS21F

— Whetstone Analysis LLC (@AnalysisLlc) August 1, 2019

Expert Outlook

“Overall, a touch supportive for fixed income markets, but not really that newsworthy given the lack of growth we've been seeing in the U.S. industrial sector in recent months,” said CIBC Capital Markets chief economist Avery Shenfeld. “The ISM had been running a bit hotter than various regional indexes, so this merely brings it into line with those measures.”

“In the last report we weren’t really sure about the extra $300 billion on Chinese goods,” Timothy Fiore, chairman of ISM’s manufacturing survey committee, said on a conference call, referring to tariffs on additional imports that President Donald Trump threatened. “We’re kind of back to where we were before the additional $300 billion was threatened. We’re back to the $250 billion. I think the community has kind of accepted that those tariffs are going to remain.”

Market Reaction

The price of spot gold ticked upward slightly following the news, although remains in negative territory following statements made by Fed Chairman Jerome Powell on Wednesday. Powell’s stance on rate cuts was unexpected, as he indicated that the rate cuts introduced would not become commonplace throughout the year.

Spot gold last traded at $1,412.04/oz, down -0.99% with a high of $1,429.37/oz and a low of $1,401.20/oz.