Manufacturing remains in contraction mode in July, reports ISM

July manufacturing output remained in contraction mode, for the fifth consecutive month, according to the new edition of the Manufacturing Report on Business, which was issued today by the Institute for Supply Management (ISM).

The report’s benchmark reading, the PMI, came in at 48.0 (a reading of 50 or higher indicates growth), down 1% off of June’s 48.0 reading, and contracting, at a faster rate, for the fifth month in a row. May came in at 48.5 and April was at 48.7, with January and February readings at 50.9 and 50.3, respectively, and were preceded by 26 months of declines. ISM added that the overall economy remained in expansion mode for the 63^rd consecutive month.

The July PMI was 0.7% below the 12-month average of 48.7, with January’s 50.9 and October’s 46.9 mark the respective high and low readings for that period.

ISM reported that seven manufacturing sectors saw growth in July, including: Apparel, Leather & Allied Products; Plastics & Rubber Products; Nonmetallic Mineral Products; Textile Mills; Miscellaneous Manufacturing; Furniture & Related Products; and Primary Metals. Sectors reporting contraction included: Printing & Related Support Activities; Paper Products; Chemical Products; Machinery; Wood Products; Fabricated Metal Products; Computer & Electronic Products; Transportation Equipment; Electrical Equipment, Appliances & Components; and Food, Beverage & Tobacco Products.

The report’s key metrics were mixed in July:

• New Orders, considered the engine driving manufacturing, rose 0.7%, to 47.1, contracting, at a slower rate, for the sixth consecutive month. The category has not seen consistent growth since a 24-month stretch of expansion ended in May 2022 (ISM reported that four sectors saw growth in New Orders in June);
• Production, at 51.4, increased 1.1% growing for the second straight month after four months of contraction, following two months of growth, as June hit the 50 mark for the first time since April 2024’s 50.7 reading, with seven sectors reporting growth in July;
• Employment, at 43.4, fell 1.6%, contracting, at a faster rate, for the sixth consecutive month, and for the 32nd time in the last 38 months, with three sectors reporting growth;
• Supplier Deliveries, at 49.3 (a reading above 50 indicates slower deliveries), were off 4.9% from June, moving faster after slowing, at a slower rate, for the seven previous months, with nine sectors reporting slower supplier deliveries;
• Backlog of Orders, at 46.8, increased 2.5%, contracting, at a faster rate, for the 34th consecutive month, following 27 months of growth, with three sectors reporting growth;
• Prices, at 64.8, were off 4.9%, increasing, at a slower rate, for the 10th consecutive month, up, with 16 sectors reporting higher prices;
• Inventories, at 48.9, fell 0.3%, contracting, at faster pace, for the third consecutive month, with 10 sectors reporting higher inventories;
• Customers’ Inventories, at 45.7, fell 1.0%, coming in “too low,” at a faster rate, for the 10th consecutive month, with three sectors reporting customers’ inventories as too high; and
• Imports, at 47.6, increased 0.2%, contracting, at a slower rate, for the fourth consecutive month, with five sectors reporting growth

Tariffs and the economy were again the main themes cited in ISM panelist comments.

“These tariff wars are beginning to wear us out,” said an Apparel, Leather & Allied Products panelist. “It’s been very difficult to forecast what we will pay in duties and calculate any cost savings we’ve had this year. Also, tariffs have disrupted our customs import bond. There is zero clarity about the future, and it’s been a difficult few months trying to figure out where everything is going to land and the impact on our business. So far, tremendous and unexpected costs have been incurred.”

A Machinery sector panelist explained that currently higher interest rates still depress the construction industry for new construction projects.

“Tariff policies are uncertain, which slows down (1) our investment in new projects, (2) component sourcing for new products, (3) blanket orders and (4) replenishment of large inventory quantities. Instead, we’re working to shift suppliers to lower political risk countries or develop domestic sources,” said the panelist. “We are impacted by the higher tariffs on costs of raw materials and components both sourced domestically and from overseas, and we expect expenses will be higher in the third and fourth quarters as we consume the inventory received with new and higher tariffs or update costs from domestic sources in the second quarter.”

In an interview with LM, ISM CEO Tom Derry said that July’s performance was notably worse in one area, with 76% of manufacturing GDP contracting and 31% contracting strongly, with those two percentage readings seeing their highest levels since December. Derry labeled it a material worsening.

“That is something to bear in mind, but it is also true that we are kind of moving sideways, and there is nothing on the horizon to indicate we will snap out of it,” he said. “There is going to have to be some sort of external shock that would come from a number of different sources. The tariff overhang also remains a big issue.”

In assessing the report’s findings, Derry observed that July overall was a little worse than June, as in June four of the top six manufacturing sectors expanded, and in July none of the top six sectors did.

As for tariffs, Derry noted that the report’s data and findings were culled prior to this week’s reciprocal tariffs announcement by the White House, adding that next month’s ISM report could potentially reflect some clarity on the trade and tariff front, in the form of some stability and predictability.

“That is the key thing,” he said. “We knew there would be tariffs in some form and are here to stay. We know what they are now, and we make a one-time adjustment. Prices are going to increase on a one-time basis, and then we just go forward, and then tariffs are kind of off the table and are no longer a supply chain issue. It's just the way the rules of the road are routed. And there's a real possibility we get to the end of 2025, and have figured out tariffs, have done what we can to mitigate, developed our strategies, and we move on. I think that I'll be very interested to see how you the August and September data reflects that. But in July, more than 70% of panelists were saying tariffs are their number one issue.”

Looking out at the balance of 2025, Derry said an optimistic scenario for manufacturing would factor in the weak employment numbers issued by the Bureau of Labor Statistics today, including the employment numbers in the ISM report, strengthening the argument to cut interest rates in September. Which he said would provide support for the manufacturing sector in a number of different ways.

That includes things like stimulating enough demand to make demand predictable, whereas today what Derry said is happening is that open positions do not appear to be getting backfilled.

“If we have more predictability, then we will see that,” said Derry. “The two subindexes that are most important are what is happening with New Orders and what is happening with Backlog of Orders as they move together. If those improve, then that will create the conditions that are more positive, and manufacturers will hire staff, they'll add shifts and a production line. That's a self-feeding kind of cycle. The other thing that's interesting to note is we had that inventory phenomenon, when we were ahead of tariffs in the first part of the year, and we've worked through those inventories now, so we have to reply some of that stock. And those three in combination—inventory rebuilds, new orders going up, and backlogs increasing—would be a perfect storm that would create great conditions for manufacturing—and it could all start with a Fed rate cut in September under that optimistic scenario.”