The Institute of Supply Management reported on Thursday its index fell to 50.5 from 56.2 in June. A number above 50 still indicates an expanding economy and is consistent with a 2.5% to 3% annual growth rate in the gross domestic product, says Newport Communications Senior Economist Jim Haughey.
“The index values at about 55 in the first half of the year reflected a very rapid initial recovery in the economy fueled by tax cuts," he says. "That's history. Now we are at a sustainable level that should yield near average GDP growth,” he says.
Haughey says the large month-to-month decline is bound to produce some added caution and slow spending and freight growth in the next few months. But he notes with the ISM sub-index for prices rising to 68.3 and the new orders sub-index at 50.4, there is no reason to believe that any absolute slowdown in manufacturing activity is coming.
Meantime a separate report from the Commerce Department on Friday showed shipments and orders of manufactured goods fell 1.0% and 2.4%, respectively, during June.
Haughey says most of the decline was in durable goods industries as they adjust to a lower pace of growth after the initial tax cut boosted the surge in the economy earlier in the year. He says the large declines are not unusual and do not signal trouble ahead.