Production and new orders eased off, but the report wasn't as bad as many observers feared.
More evidence that the economic recovery is losing steam surfaced Monday in two widely read barometers of manufacturing activity.
Production and new orders still grew in July, but at the slowest rates since March, according to the Institute for Supply Management (ISM). The organization's manufacturing index, based on interviews with hundreds of businesses nationwide, was 55.5 compared with 56.2 in June.
Still, markets appeared relieved the slowdown wasn't more pronounced, with the Dow Jones industrial average rallying to its highest level in 10 weeks.
Driven both by the manufacturing study and encouraging reports from overseas, the index gained almost 2 percent to close at 10,674.38. The Standard & Poor's 500 index rose more than 2 percent to close at 1,125.86.
It was the 12th consecutive month the ISM index has registered higher than 50, a level that indicates economic growth. But it was third consecutive monthly decline in the index since it hit 60.4 in April and the lowest reading since December 2009.
A similar study of a nine-state Mid-America region that includes Minnesota also showed a lower level of expansion. The index, overseen by economics Prof. Ernie Goss at Creighton University, was 60.8 vs. 62.5 in June and 64.2 in May.
"It was far more positive than many people expected," said Goss of the Creighton study results. "Both our index and the ISM index were down, but not to any sort of danger level."
Both studies in June had indicated a slower rate of economic expansion was on the way. Norbert Ore, chair of the ISM business survey committee, said that after an initial robust rate of expansion earlier this year it wouldn't be surprising to have growth slow down. Ore pointed out employment, supplier deliveries and inventories all improved in July and softened the impact of the slower rate of growth in production and new orders.
"The ISM report shows that manufacturing activity is in the middle of the index's growth range," said Daniel Meckstroth, chief economist for the Manufacturers Alliance/MAPI. He said manufacturing activity is decelerating because it is no longer being driven by businesses rebuilding their inventories.
Goss agreed and said growth rates are likely to continue dropping off until consumers regain confidence and start spending again.
As with ISM study, the Creighton survey showed continuing improvement in the labor market and the employment outlook for the rest of this year. Just 13 percent of the Creighton study respondents said they expected to lay off workers in the next six months.
Goss conceded, though, that may be because many employers already cut their workforces so deeply during the recession they simply can't cut any more. "We're far from recovering all the jobs we lost," he said.
The Creighton study showed continued growth for Minnesota's durable and nondurable manufacturers but at a slightly slower rate. "This expansion has spilled over into the rest of the state economy. As a result, I expect second-half job growth in Minnesota to match annualized growth of 2 percent in the first half," Goss said.
Susan Feyder • 612-673-1723