S&P Global US Manufacturing PMI: Production Falls As Demand Weakens - Where Is This Economic Trend Headed?

On Monday, The S&P Global U.S. Manufacturing PMI (purchasing managers index) for July was at its lowest in the past two years as output and new orders decreased.

“The rising cost of living is the most commonly cited cause of lower sales, as well as the worsening economic outlook," according to Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.

Key Data Points:

• Production falls as demand conditions weaken.
• Inflationary pressures ease due to input and output costs softening.
• Labor and material shortages persist.
• Input prices for manufacturers rose in July.

Also Read: Recession Debate: Is It Over Or Just Starting?

Why PMI Is Important: According to Investopedia, the PMI is an essential economic indicator as it surveys supply chain managers across 19 industries from over four hundred companies. It measures the direction of economic trends in the manufacturing and service sectors.

The PMI can be used by purchasing managers, business decision-makers, market analysts, and investors to provide insights on whether market conditions are expanding, contracting or remaining the same.

Manufacturing Conditions: Since the drop in output in June 2020, backlogs began to increase due to the shortages of labor and material, according to S&P Global.

The adjusted U.S. manufacturing purchasing managers index was 52.2 in July, down from 52.7 in June, which can be attributed to a drop in production in July, due to weakened client demand, raw material shortages, and challenges in finding candidates for vacancies.

Williamson noted that besides the pandemic lockdowns, “July saw US manufacturers report the toughest business conditions since 2009.”

Factory goods are down for the second consecutive month which lead to the first drop in production in two years, he added. Additionally, foreign client demand decreased at the start of the third quarter, noting that new exports fell at the fastest pace since May 2020.

Willamson mentioned that companies are cautiously purchasing inventories and cutting back on investments, as new orders for business equipment and machinery are sharply declining.

However, cost inflation weakened to the slowest since March 2021 as some components fell in price, Willamson noted that supply chain issues are easing which takes price pressures off a variety of inputs signaling that inflation may have peaked.

Furthermore, backlogs increased in July as material shortages put more pressure on staff capacity, as firms have the challenge of sourcing raw materials and having enough employees at the correct times.

Outlook: Due to a gloomy global economic outlook, firms expect output to remain at its lowest since October 2020, citing supply chain and inflation concerns.