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Manufacturing numbers difficult to read, but U.S. retains manufacturing cost advantage

Manufacturing in the United States continues to be a difficult animal to track. Numbers are positive but dropping slightly, according to the Institute for Supply Management's July 2015 Manufacturing ISM Report on Business. The July Purchasing Managers Index (PMI) decreased slightly (0.8%) to 52.7%, erasing the slight 0.7% June increase. Manufacturing seems to be in hover mode—not really going anywhere fast.

According to the various indexes, the ups and downs affected all areas of the ISM's measurements. The New Orders Index registered 56.5, up 0.5% from June, which is still in the "growing" direction, however small that growth might be. The Production Index ticked up nicely by 2.0% to 56.0% from June's 54.0%.

So if new orders and production both grew, employment should be up, right? Wrong! The Employment Index dropped 2.8% to 52.7%, down from June's 55.5%.

It would also make sense that if production is up, backlog of orders would be down, and they are—by 4.5% from 47.0 in June to 42.5 in July.

Supplier deliveries were up a mere 0.1% from 48.8 in June to 48.9 in July. Inventories continue to contract from 53.0% in June to 49.5% in July, and customer inventories are categorized as "too low," dropping 4.5% from 48.5% in June to 44.0% in July (contracting even further).

The only good news is that prices are also decreasing, from 49.5% in June to 44.0% in July—a significant drop of 5.5%.

Plastics and rubber products were one of five industries reporting a "contraction" for the month. Fabricated metal products is also showing up in the contraction mode, and one respondent from that industry said, "The market is in the summer slow down."

In other manufacturing news, the Boston Consulting Group (BCG) just released its latest report, noting how, despite a strong dollar, the United States retains a big manufacturing cost advantage over Europe, Japan and other developed countries. Released on July 23, the report noted that "the rise of the U.S. dollar against the euro and other world currencies over the past year has reduced the cost competitiveness of U.S. manufacturing compared with economies such as Germany, France, Japan, Australia and Brazil. But the United States still maintains a very significant cost advantage over these economies, and therefore manufacturers are unlikely to shift production to other nations."

The findings are based on an updated assessment of direct manufacturing costs based on BCG's Global Manufacturing Cost-Competitiveness Index, which tracks changes in production costs in the world's 25 largest export economies. The index covers four primary drivers of manufacturing competitiveness: Wages, productivity growth, energy costs and currency exchange rates.

"Since mid-2015, the manufacturing cost advantages of China, South Korea, India and Mexico have narrowed considerably against European economies and Japan, though not against the U.S., because their currencies have remained relatively stable against the dollar. Switzerland and South Korea lost competitive ground against all major goods-exporting economies, mainly because of currency fluctuations.

"While the major drop in the euro has reduced costs for European exporters, they're still about 10% more expensive on average than U.S.-based manufacturers," said Harold L. Sirkin, a BCG senior partner and co-author of the analysis. "The U.S. remains one of the lowest-cost locations for manufacturing in the developed world."

BCG also noted that the U.S. has a "big energy-cost advantage that has largely been driven by the sharp fall in U.S. natural-gas prices since large-scale production of U.S. shale gas began in 2005. Natural gas is a key input in industries such as chemicals and plastics, and a major factor in sectors that use a lot of electricity." (That would also be the plastics industry where reliable, steady electricity is key to productivity and quality.)

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