By Lucia Mutikani
WASHINGTON (Reuters) - U.S. manufacturing activity accelerated to its highest level in nearly 1-1/2 years in July as orders increased despite a resurgence in new COVID-19 infections, which is raising fears about the sustainability of a budding economic recovery.
Still, the road to recovery for manufacturing likely remains long and bumpy, with the survey from the Institute for Supply Management (ISM) on Monday also showing hiring at factories remaining subdued for a year now. About 72% of industries reported growth last month.
"After the scale of shutdowns we really should be seeing a large proportion of firms saying they are experiencing rising output," said James Knightley, chief international economist at ING in New York. "Jobs continue to be lost in the sector. With COVID-19 cases picking up, businesses are likely to remain cautious."The ISM said its index of national factory activity raced to a reading of 54.2 last month from 52.6 in June. That was the strongest since March 2019 and marked two straight months of expansion. A reading above 50 indicates growth in manufacturing, which accounts for 11% of the U.S. economy. Economists polled by Reuters had forecast the index would rise to 53.6 in July.
The ISM said "sentiment was generally optimistic" among manufacturers. The continued improvement in manufacturing despite skyrocketing coronavirus cases, especially in the densely populated South and West regions where authorities in hard-hit areas are closing businesses again and pausing reopenings, is encouraging.
High-frequency data such as weekly applications for unemployment benefits has suggested the economic recovery that started in May with the reopening of businesses was faltering.
Claims for jobless benefits have risen for two straight weeks. A staggering 30.2 million Americans were receiving unemployment checks in early July.
The economy suffered its biggest blow since the Great Depression in the second quarter, with gross domestic product contracting at its sharpest pace in at least 73 years.
But momentum in factory activity could be already slowing. A separate survey from data firm IHS Markit on Monday showed its final manufacturing PMI slipping to 50.9 in July from a preliminary reading of 51.3 more than a week ago. The PMI was still up from a reading of 49.8 in June.
Stocks on Wall Street were trading higher as Microsoft Corp (NASDAQ:MSFT)'s pursuit of TikTok's U.S. operations and a clutch of upbeat quarterly earnings reports lifted investor sentiment. The dollar rose against a basket of currencies. U.S. Treasury prices fell.
NEW ORDERS ACCELERATE
The ISM said 13 industries including wood products, primary metals and electrical equipment, appliances & components reported growth in July. Manufacturers of transportation equipment, machinery and fabricated metal products reported contraction.
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.
Despite the surge in new orders, manufacturers' assessment of business was not as upbeat. Transportation equipment makers said "overall business remains down almost 70%."
Furniture makers said they had reduced production and expected additional layoffs. Food manufacturers, whose business has been booming as the pandemic triggered panic buying, worried about uncertainty over schools opening in the fall.
Lack of demand has been highlighted by major manufacturers. Caterpillar Inc (NYSE:CAT) last week reported lower second-quarter earnings. The heavy equipment maker, a bellwether for economic activity, said retail sales declines would not worsen in the current quarter, but did not expect them to improve either.
Boeing (NYSE:BA) Co reported a bigger-than-expected quarterly loss and slashed production on its widebody programs.
Though factory employment continued to improve last month, it remained in contraction territory for 12 straight months. The ISM's manufacturing employment measure rose to a reading of 44.3 from 42.1 in June. This supports economists' expectations for a moderation in employment growth in July.
According to a Reuters survey of economists, nonfarm payrolls likely increased by 1.6 million jobs last month after a record 4.8 million in June. The Labor Department is scheduled to release July's employment report on Friday.
"At face value, that lends some support to our forecast that while overall non-farm payrolls continued to rebound in July, they did so at a much slower pace than previous months," said Andrew Hunter, a senior economist at Capital Economics.
Factory employment was already in decline because of the Trump administration's trade war with China.
A separate report from the Commerce Department on Monday showed construction spending dropped 0.7% in June, pulled down by declines in both private and public outlays, after decreasing 1.7% in May. The third straight monthly decline pushed outlays to a one-year low of $1.355 trillion. Economists had forecast construction spending would rebound 1.0% in June.
"The trend will likely remain subdued over coming months as activity and demand remain restrained," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains, New York.