Market Overview

Survey Data Suggest Some Loss In Momentum In The Economy, But Capacity Remains Tight

Survey Data Suggest Some Loss In Momentum In The Economy, But Capacity Remains Tight

Survey data in both the manufacturing and service sectors signal that growth continued at a slightly slower pace at the start of the 3rd quarter. Concerns over tariffs, labor shortages, and freight capacity remain issues in the economy overall, and may have contributed to the moderation in growth.

Data from the Institute of Supply Management (ISM) showed that US factory activity expanded at a slightly slower pace in July, as the manufacturing purchasing manager's index fell 2.1 points to 58.1 on a seasonally adjusted basis. This fell short of consensus expectations of a slight decrease to 59.1 and is the first decline in the index in three months.  Reading on new orders, current production, order backlogs, and supplier deliveries all saw significant declines during the month. This would serve as a sign that some of the pressure is easing on the manufacturing side of the economy after rapid growth during the 2nd quarter.

Data from the service sector tells a similar story, as the ISM nonmanufacturing index rose to fell to 55.7 in July from 59.1 in the previous month. This also fell short of consensus expectations of to 58.4 as the service sector retreated back to more normal levels of growth. Like the manufacturing readings, many of the subindices on the non-manufacturing side of the economy saw big declines in July including order backlogs, business activity, and new orders.

Slower, not slow

IT is worth noting, however, that growth still seems to be healthy on both sides of the economy despite July's declines. Results from June were at or near historical highs for many of the subindices in the ISM data, so a drop off in July was likely and not necessarily a sign of real weakness. Of the 18 industries covered in the manufacturing index, 17 reported growth with only Primary Metals manufacturers reporting a decline in activity.

Similarly in the service sector, 16 of the 18 service industries surveyed for the index reported growth in June, with only Educational Services and Professional and Business Services signaling that conditions had softened in the industry.

This would suggest that the economy overall got off to a slower pace at the start of the 3rd quarter. Keep in mind, however, that GDP growth was a whopping 4.1 percent in the 2nd quarter, so some moderation in growth would still indicate that the economy is growing at a healthy pace.

Tariffs, labor shortages remain concerns

As has been the case over the past several months, tariffs remained the chief issue facing producers on both sides of the economy. One manufacturer of woods products sounded the alarm on trade policy, noting "The so-called trade war is now taking its toll on business activity, resulting in substantial reductions to new export orders. China has all but stopped taking orders, causing inventories to build up in the U.S. Domestic business is steady. However, it is too small to carry the load that export markets have retreated from."

Other respondents were more subdued in their assessment of tariffs, with most noting that trade policy was causing them to rethink existing strategies. One respondent in Public Administration services noted: "Expanding concerns with price increases due to tariff and global trade policy changes and uncertainty. Receiving more requests from suppliers for price increases due to changes in the costs of steel, aluminum and the like."

Labor shortages and freight capacity also remain key concerns for producers in the economy. Respondents across the board noted the general strength in demand and orders, especially in the domestic economy. However, responses during the month continue to suggest that businesses on both sides are running near capacity and a struggling to fulfill existing demand.


One Machinery manufacturer called attention to the labor shortage, saying: "Business is moving along at a brisk pace, outperforming the annual plan year-to-date (calendar year financials). However, internationally, nationally and locally, we are finding many manufacturers behind schedule due to capacity constraints. They are stating their order intake is heavy and/or they cannot find qualified employees to get all the work done." Another respondent in Wholesale Trade services summed up everything, noting "Import tariffs on wood and steel (are chief concerns). Shortages of rail cars, truck drivers and skilled labor. High-priced construction materials."

About the ISM Index

Each month, the Institute of Supply Management surveys purchasing managers in the manufacturing and service sectors on different aspects of business, asking whether or not their activity is expanding or contracting. Data is collected on things such as employment, production, prices, exports, inventories, and orders. Responses are then weighted to create the ISM manufacturing and nonmanufacturing indices.

Readings above 50 signal that more than half of the respondents to the survey believe that overall manufacturing activity is expanding during the month, while readings below 50 are a sign that activity is contracting. Historically, index results over 55 are a sign of above-trend growth in the manufacturing sector.

ISM data also gives some insight into trucking freight conditions. Manufacturing production is one of the key supports for freight demand in the economy, and readings from the ISM index typically are a leading indication on the amount of truck tonnage growth in trucking markets. 

Behind the Numbers

In a sense, the ISM results from this month are essentially in line with recent months, which have been suggesting that tariffs and labor constraints are on everybody's radar. The slower readings from both sectors also were not a big surprise, given how strong of a month June was and the array of temporary factors that made growth stronger than usual during the 2nd quarter.

What is interesting in this month's results is that there was significant commentary among responses that suggests that tariffs are having a tangible effect on performance. Since the tariffs on steel and aluminum were announced in February, ISM respondents have expressed worries and uncertainty over trade policy and the potential implications that changes might have on business conditions. With each passing month, there has been a larger group of respondents that suggest that tariff impacts are moving beyond just worry and concern into actual bottom-line results. A key trend to watch is how this plays out into hard output and trade data in the second half of the year.

Ibrahiim Bayaan is FreightWaves' Chief Economist. He writes regularly on all aspects of the economy and provides context with original research and analytics on freight market trends. Never miss his commentary by subscribing.

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