Manufacturing picks up, but construction remains limited

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Although the Institute for Supply Management's manufacturing index hit a 16-month high in July, suggesting activity is "picking back up," it won't be robust for some time, experts say. Meanwhile, construction spending remains "limited due to COVID-19."

The ISM manufacturing index climbed to 54.2 in July from 52.6 in June.
Economists polled by IFR Markets expected the index to rise to 53.6%.

“The ISM U.S. manufacturing sentiment index posted its second consecutive month in expansion territory,” said Roiana Reid, U.S. economist at Berenberg Capital Markets. “Notably, an elevated share of manufacturers’ continue to view their customers’ inventories as 'too low,' pointing to continued increases in production in the near term.”

The new orders index rose to 61.5 from June’s 56.4. Production gained to 62.1 from 57.3 from the previous month.

The employment index edged up to 44.3 from 42.1, while the supplier deliveries gained to 55.8 from 56.9 and the inventories index dipped to 47.0 from 50.5.

Customer inventories dropped to 41.6 from 44.6 and the prices index climbed to 53.2 from 51.3.

The backlog of orders index increased to 51.8 from 45.3, while new export orders jumped to 50.4 from 47.6 and the imports index gained to 53.1 from 48.8.

“The ISM manufacturing survey for July showed factory activity is improving, mainly supported by a strong jump in new orders,” said Ed Moya, senior market analyst at OANDA. “Demand is improving, however the rebound in manufacturing will not likely trigger any strong hiring waves. The service part of the U.S. economy is more important and that is likely to remain in contraction territory.”

Construction spending
Construction spending fell 0.7% in June, after a revised 1.7% decline in May, first reported as a 2.1% drop, according to data released by the Commerce Department Monday.

Economists expected a 1.0% rise in construction spending.

Year-over-year, spending rose 0.1%.

“The construction industry is poised to fare better than service-based industries during this COVID-19 recession; construction could actually add to employment over the summer,” according to Yelena Maleyev, economist at Grant Thornton. “However, spikes in COVID cases and deaths throughout the country, along with significant delays in federal support, create significant headwinds for the economy in the second half.”

For the first half of the year, construction spending increased 5.0% from the same period last year.

“As many Americans continue to work from home, it comes as no surprise that wood products, furniture and textiles posted the strongest growth,” Moya said. “The harsh reality is many Americans will spend more time at home this fall and this will make Wall Street continue to like the home-improvement chain stores. The June construction data showed the fourth straight decline and will likely struggle to rebound until reopenings keep heading in the right direction.”

Private construction spending fell 0.7% from May, while residential construction dropped 1.5% and non-residential construction gained 0.2%.

“Rock-bottom interest rates and growing demand for housing, especially by younger cohorts, will boost the need for more homes; current supply is short, causing bidding wars in many hot markets,” Maleyev said.

Public construction in June slid 0.7%.

“State and local government coffers were drained in responding to COVID,” said Maleyev. “Federal support is still pending, but the new fiscal year began for many states and municipalities on July 1. The biggest components of state and local construction — education, transportation and highways and streets — will experience significant losses if federal support is not provided. Employment by state and local governments has accounted for up to 13% of all jobs in the U.S.”

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Economic indicators Construction industry Manufacturing industry