MNI INTERVIEW: Muted Factory Growth in Months Ahead: ISM Chief

U.S. factory output jumped in July for a second straight month and could stay positive in the coming months but might remain bound at relatively lower levels amid working adjustments to the coronavirus, ISM manufacturing chair Tim Fiore told MNI Monday.

The ISM Manufacturing PMI for July came in with a monthly jump of 1.6 points to 54.2, the strongest reading since early 2019. The ISM's forward-looking new orders sub-index increased to a reading of 61.5 in July, the highest since September 2018, from 56.4 in June. The survey's measure of order backlogs at factories rebounded as did orders for exports.

"Last month we had a lot of comments about suppliers being able to perform to the company's demands. This month there's a little bit more of a concern about future demand for themselves. And I think that's caused by the uncertainties of the real openings here and it's going to remain to be seen what happens in August," Fiore said.

The ISM's measure of production increased in July to 62.1, the highest level since August 2018, and a gauge of orders climbed to 61.5, the strongest since September 2018.

"This is stronger than I thought at the beginning of July for sure," Fiore said. "It was a good month."

But businesses remain only partially open at the moment, Fiore said, running somewhere between 60% and 70% compared to where they were in the fourth quarter of 2019.

"That's the reality of the situation, simply because of social distancing, and the inefficiencies of bringing people back, many, many companies have reported significant absenteeism and we actually have a lot of comments on the panel about the non-incentive for people to return at the lower pay scales because of the USD600 per week additional bonus of the government's paying through unemployment."

RANGE-BOUND

The ISM chief predicted positive PMIs in the months ahead "barring some extremely difficult event."

Looking forward to August, Fiore said he doesn't expect "going back into contraction territory."

"The question becomes at what rate and I don't see beyond 55," he said, referring to the PMI.

"I figured when we started to come out of this we would deliver between 48 and 52," he said. "Last month I thought more 49 to 53. This month I probably would stay with that same comment of 49 to 53. That's where we're at."

"I don't think we are looking at a very dramatic recovery," he said. "But I would expect this to remain in expansion territory."

DEMAND IMPROVED

For July, Fiore said he was pleased with demand being so strong, with new orders at 61.5 and the export orders index at 50.4.

"There's some demand coming from overseas but it's not driving things in the short-term," he said.

Though factory employment continued to improve last month, it remained in contraction territory, showing manufacturers remain cautious about the sustainability of demand. The ISM's manufacturing employment measure rose to 44.3 from 42.1 in June.

Fiore said he doesn't see "employment really coming back in the short term," and the suppler deliveries index will become "more difficult."