• The ISM manufacturing index rose in July but has been in contraction since late 2022.
• The pace of decline in manufacturing slowed from June.
• Manufacturing activity will continue to fall in the near term due to tight monetary policy.
• Manufacturing employment will fall in the second half of 2023.

The ISM manufacturing index rose slightly in July, to 46.4% from 46.0% in June, but remained well below the 50% level that indicates expansion in manufacturing. The index has been below 50% for nine straight months.

The ISM manufacturing index continues to show contraction in the industry, consistent with other measures such as industrial production. The rapid increase in interest rates over the past couple of years as the Federal Reserve has tightened monetary policy, as well as weaker demand for manufactured goods following very strong demand in the wake of the pandemic, are weighing on manufacturing industries. Manufacturing is set to contract further in the near term as high-interest rates; falling consumer goods spending, particularly on interest-rate sensitive goods like vehicles, appliances, and home materials; and softer business capital spending are all drags. Manufacturing employment has been flat so far in 2023 and will fall later in the year as the industry continues to contract.

All five of the major components used to calculate the ISM index were below the 50% level in July. The production, new orders, inventories, and supplier deliveries components rose over the month, while the employment index fell.

All five of the subindices not used to calculate the overall index were below 50% in July, although four of the five rose over the month. The prices index indicates falling prices for manufactured goods, although the rate of decline slowed from June.

Only two manufacturing industries reported growth in July, petroleum and coal products and furniture and related products. The remaining sixteen industries reported contraction, with the steepest declines in apparel and leather and plastics and rubber. Anecdotal comments generally indicated softer demand in July.

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