Manufacturing sank deeper into the economic contraction last month, weighed down by political uncertainty and unwaveringly high interest rates, according to July purchasing managers’ indexes.
The July PMI from the Institute for Supply Management it stood at 46.8%, 1.7 percentage points less than in June, as demand continues to slow. The new orders index fell nearly 2 percentage points to 47.4%, which also pushed output down to 45.9% as companies curbed production in response to stagnant demand.
A reading below 50.0% in a PMI index indicates an economic contraction.
“We are entering a deeper period of slowdown as demand remains elusive,” Timothy Fiore, chairman of ISM’s Manufacturing Business Survey Committee, said on a call with the media on Thursday.
Fiore added that interest rate uncertainty remains the “biggest factor” holding companies back from investing in working capital.
The Federal Reserve it left short-term interest rates unchanged at its meeting on Wednesday, but opened the door to future rate cuts if inflation continues to cool, which could happen as early as September.
Manufacturers are also holding off on other major investments until after the presidential election in November. Given the differing economic plans of Republican nominee former President Donald Trump and presumptive Democratic vice presidential nominee Kamala Harris, Fiore said businesses don’t want to be baited into investing before the administration changes.
“Their investment plans and the economy are significantly different, and as a result, it’s freezing out a lot of businesses,” Fiore said.
The S&P Global PMI July report he also noted the negative impact of political uncertainty on economic performance. Its PMI rose to 49.6 in July, but is still down from June’s 51.6.
Much of the decline was due to a decline in new orders for the first time in three months amid a “general slowdown” in demand, according to S&P Global.
“Many companies expect the weakness to be temporary, related to spending and investment pausing ahead of the presidential election,” Chris Williamson, chief economist at S&P Global Market Intelligence, said in a statement. “However, business output expectations a year from now remain subdued by historical standards, reflecting additional concerns about the impact of higher interest rates and lingering inflation.”
The two indexes painted different pictures of the manufacturing job landscape. ISM reported a 5.9 percentage point drop in its employment index to 43.4%, with many companies cutting staff or preparing for layoffs amid sluggish demand and market uncertainty, it Fiore said.
S&P Global, meanwhile, still saw employment levels rise in July, with companies adding jobs and replacing departing workers. However, levels rose at the slowest pace since January.
With output largely stagnant across the industry, Fiore said that even after the Fed cuts interest rates, it could take at least a quarter for the PMI to improve significantly.
“We won’t have clarity until we see the Fed move on interest rates and know where we’re moving from a policy standpoint,” Fiore said. “We won’t know much until after the election.”
