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It turns out that manufacturing growth might actually run into some headwinds from tariffs and trade disputes after all. Some of the concerns might make sense, and but other concerns may fade away in the months ahead. IHS Markit released its U.S. Manufacturing Purchasing Managers Index (PMI) for July, and the Institute for Supply Management (ISM) released its manufacturing survey via its own manufacturing PMI reading. Both showed a degree of slightly lower growth while pricing pressure and tight markets are playing a role.

According to the IHS Markit PMI for July, the index dipped to 55.3 from 55.4 in June. While this was still above the 50.0 barometer that measures growth rather than contraction, the July reading was a five-month low and the manufacturing sector was called the “joint-weakest in 2018 to date.”

The headline figure for the IHS Markit PMI is a weighted average of five indices: New Orders (30%), Output (25%), Employment (20%), Suppliers’ Delivery Times (15%), and Stocks of Purchases (10%).

Several key observations were included in the IHS Markit release. Despite easing slightly (one-tenth of one point), manufacturing growth was said to remain strong. The July data also showed that inflationary pressures intensified at the same time that output expanded at its softest pace for eight months. And on that trade war and tariff front, IHS Markit indicated that export sales in July fell for the second month in a row. Still, backlogs continue to rise with an upturn in new orders.

The Manufacturing ISM Report on Business showed that July’s PMI reading came in at 58.1%. This was a wider overall drop in manufacturing as a decrease of 2.1 percentage points from the June reading of 60.2%. The ISM manufacturing report was broken down as follows:

• The New Orders Index registered 60.2 percent, a decrease of 3.3 percentage points from the June reading of 63.5 percent.
• The Production Index registered 58.5 percent, a 3.8 percentage point decrease compared to the June reading of 62.3 percent.
• The Employment Index registered 56.5 percent, an increase of 0.5 percentage point from the June reading of 56 percent.
• The Supplier Deliveries Index registered 62.1 percent, a 6.1 percentage point decrease from the June reading of 68.2 percent.
• The Inventories Index registered 53.3 percent, an increase of 2.5 percentage points from the June reading of 50.8 percent.
• The Prices Index registered 73.2 percent in July, a 3.6 percentage point decrease from the June reading of 76.8 percent, indicating higher raw materials prices for the 29th consecutive month.

As for the inflation and supply chain pressures, IHS Markit said of July:

Pressure on supplier chains also intensified, as highlighted by delivery times lengthening to the greatest extent since the series began. Increased demand for inputs was exacerbated by firms reportedly stockpiling raw materials. Moreover, the rate of input price inflation accelerated to the third-fastest since March 2012 and was sharp overall. Firms also commented on efforts to pass costs onto clients through higher prices, with the rate of charge inflation accelerating to the fastest since June 2011. However, some stated that competition between firms weighed on overall pricing power… Difficulties in sourcing raw materials also fed through to a weaker rise in purchasing activity. That said, signs of stockpiling were evident in a faster increase in pre-production inventories, which rose at the quickest pace since January.

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Chris Williamson, chief business economist at IHS Markit, discussed headwinds of supply shortages, rising prices and deteriorating exports in July. He said:

The latest survey showed output rising at a rate roughly equivalent to an annualized 1% pace of expansion, which is the weakest since late last year. While a weakening of new export orders for a second successive month suggested foreign demand has waned compared to earlier in the year, the slowdown can be also in part attributed to increased difficulties in sourcing sufficient quantities of inputs. Suppliers’ delivery delays were more widespread than at any time in the survey’s history. With producers often scrambling to buy enough raw materials, suppliers enjoyed greater pricing power. Not surprisingly, with tariffs also kicking in, cost pressures spiked higher again.

Some relief for manufacturers came from strong domestic demand, which meant firms were increasingly able to pass higher costs on to customers. Average prices charged for goods consequently rose at the steepest rate for seven years, which is likely to feed through to higher consumer prices in coming months.