WASHINGTON -- U.S. manufacturing improved again in July, with a key gauge of activity rising further into expansion territory.
The Institute for Supply Management, an association of purchasing managers, said Monday that its manufacturing index rose to 54.2 last month, up from a June reading of 52.6. Any reading above 50 signals expansion.
The index dipped below 50 in March, indicating a recession in manufacturing as the coronavirus pandemic shut down factories. The overall economy fell into a recession in February and the government reported last week that the gross domestic product plunged at an annual rate of 32.9% in the April-June quarter, the biggest drop on record going back to 1947.
Of 18 manufacturing industries, 13 reported growth in July, led by wood products and furniture and related products. The three industries reporting contractions in July were transportation equipment, machinery and fabricated metal products.
While it was the second straight month that the manufacturing index has been above the 50 threshold, economists cautioned that the outlook is clouded by spreading infections in the U.S. South, West and Midwest.
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"Manufacturing is recovering from low levels and the outlook is uncertain, given the threat of repeated disruptions from virus outbreaks," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.
Timothy Fiore, chairman of the institute's manufacturing survey committee, said it was encouraging that positive comments from survey participants were running two to one ahead of more cautious comments.
"We've got the ups and the downs a bit, but I think everything indicates from the panel that July was a much better month than June, as you would expect," Fiore said in a call with reporters. "It was a good month and I don't see anything in the month of August that is going to turn that below 50."
Output is strengthening because virus-induced shutdowns of factories in the spring, including the nation's automakers, forced retailers and other end-users to deplete inventory to meet demand.
The group's index of customer inventories fell to 41.6 in July, the lowest this year, showing that stockpiles were shrinking at a faster pace. Factory inventories also declined after barely growing a month earlier.
The improvements in orders and output still aren't generating much hiring, however, as manufacturers remain cautious about the sustainability of demand. While in line with its pre-pandemic level, the institute's factory employment gauge still shows payrolls are declining, albeit at a slower pace.
"The health and economic crisis are inextricably linked, and the economic recovery cannot be ensured until the impact of the virus is contained," said Oren Klachkin, lead U.S. economist for Oxford Economics. "We expect manufacturing to grow gradually ahead with botched management of the pandemic and ongoing virus-related uncertainty set to constrain activity."
A separate report showed U.S. construction spending fell again in June, the fourth straight decline as the coronavirus outbreak continues to wreak havoc on the economy.
Spending on construction projects fell 0.7% in June as both home building and nonresidential activity declined, the Commerce Department said Monday. Private and government spending on construction both also declined by 0.7%.
The construction industry has been hammered by shutdowns forced by the pandemic. As cases rise again in some parts of the country, there are concerns about further building declines in coming months.
Analysts had expected a turnaround in spending in June as many parts of the country reopened, but it did not happen. May's number, however, was revised upward.
Home building in June fell 1.5%, dragged down by a 3.6% drop in single-family home projects. That was somewhat offset by a 3% rise in multifamily home building.
Nonresidential construction rose 0.2%, led by increases in hospitals and clinics, manufacturing facilities and hotels.
Information for this article was contributed by Martin Crutsinger and Matt Ott of The Associated Press and by Vince Golle of Bloomberg News.