July 2010 ISM Reports: Manufacturing Sector Growth Slows – Again; Service Sector Growth Increases

The Institute for Supply Management’s (ISM) reports on the manufacturing and service sectors provide a more up-to-date view of conditions than either the Federal Reserve Board’s report on industrial production and capacity utilization or the U.S. Census Bureau’s report on manufacturers’ shipments, inventories and orders.

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"Manufacturing continued to grow during July, but at a slightly slower rate than in June,” said Norbert Ore, chair of ISM’s Manufacturing Business Survey Committee. “Employment, supplier deliveries and inventories improved during the month and reduced the impact of a month-over-month deceleration in new orders and production. July marks 12 consecutive months of growth in manufacturing, and indications are that demand is still quite strong in 10 of 18 industries. The prices that manufacturers paid for their inputs were slightly higher but stable, with only a few items on the short supply list."

The slowdown in the rate of manufacturing growth is troublesome, because the PMI’s trajectory often foretells the direction total private employment will take several months later. I.e., because the PMI rolled over in May, total private payrolls may begin shrinking again in 4Q2010.

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Most metrics of performance for paper manufacturing were positive in July but, strangely, Wood Products was not mentioned once in the report. We are unsure whether the missing data indicates no change in Wood Products’ situation or a lack of responses from that industry.

The service sector grew a bit faster in July than it had in June; the non-manufacturing index rose 0.5 percentage point (to 54.3 percent). Data was rather spotty for the individual service industries we track. Real Estate, Rental & Leasing led the list of industries reporting overall growth, while Construction led the list of contracting industries.

Input prices rose at a slightly faster pace for manufacturing industries and at a slightly slower pace for the service sector. Relevant commodities whose prices increased in July include: coated groundwood, corrugated containers/products, and both #2 diesel and gasoline. No relevant cmmodities were down in price. Coated freesheet and coated groundwood were two commodities listed as being in short supply.