U.S. manufacturing expanded at a softer -- yet still solid -- pace in July as producers grappled with persistent bottlenecks and input shortages.
The Institute for Supply Management's gauge of factory activity eased for a second month, to 59.5 from June's 60.6, according to data released Monday. Readings above 50 indicate expansion. The median projection in a Bloomberg survey of economists called for a July reading of 61.
Order backlogs edged up to an elevated level as a measure of production cooled, suggesting supply and shipping challenges are restraining manufacturing growth.
"Companies and suppliers continue to struggle to meet increasing demand levels," Timothy Fiore, chair of the institute's manufacturing business survey committee, said in a statement. "As we enter the third quarter, all segments of the manufacturing economy are impacted by near record-long raw-material lead times, continued shortages of critical basic materials, rising commodities prices and difficulties in transporting products."
Because of those production constraints, factories have had to draw down stockpiles to keep up with robust demand growth. In the second quarter, business equipment investment posted another solid gain and consumer spending accelerated to one of the fastest paces in decades, government figures showed last week.
July was the 14th consecutive month manufacturing has grown after contracting in April 2020 when the coronavirus triggered nationwide business shutdowns.
The institute's index of customer inventories slumped to a record low last month. Replacing those depleted inventories should fuel output gains in future months, but when those production constraints will ease is unclear.
The group's gauge of prices paid for raw materials cooled in July to a still-high 85.7 after rising in June to the highest level since 1979.
A gauge of factory employment rebounded in July, showing companies had slightly more success hiring workers in the month. The government's monthly jobs report on Friday is projected to show manufacturing payrolls increased by 30,000 in July. Overall employment is forecast to rise by about 875,000.
Fiore expects current labor shortages to ease and that more people will join the labor force in coming months as expanded unemployment benefits tail off and students go back to school.
Others see the potential for sustained problems in the supply chain.
"Consumer demand will continue to provide a platform for manufacturing's recovery from the pandemic-induced recession, but scarcity of intermediate goods, components and labor resources will act as a brake on the pace of growth," Kurt Rankin, an economist at PNC, said in a research note.
Seventeen of 18 manufacturing industries reported growth last month, led by furniture, printing and apparel.
The only industry reporting a decrease in July from the previous month was textile mills.
The report also showed the average lead time for materials used in the production process eased slightly to 86 days in July from a record 88 days a month earlier.
Information for this article was contributed by Vince Golle of Bloomberg News (WPNS) and by Martin Crutsinger of The Associated Press.