Manufacturing expands in July, but at slower pace

NEW YORK (CNNMoney.com) -- Manufacturing activity expanded for the 12th consecutive month in July, but at a slower rate than the month before, according to a purchasing managers' index released Monday.

The Institute for Supply Management (ISM) index of U.S. manufacturing dropped to 55.5 in July from 56.2 in June. Any score above 50 indicates growth in the manufacturing sector.

While the report shows growth in the manufacturing industry slowed during the month, July's number is slightly better than analysts expected, showing higher employment, supplier deliveries and prices in the industry.

Economists surveyed by Briefing.com were expecting a reading of 54.2.

"July marks 12 consecutive months of growth in manufacturing, and indications are that demand is still quite strong in 10 of 18 industries," Norbert Ore, chairman of the Tempe, Ariz.-based ISM's Manufacturing Business Survey Committee, said in a statement.

Of the 18 industries surveyed in the report, 10 reported growth. Plastics and rubber products, electrical equipment and appliances were among the industries showing the strongest growth.

Overall, manufacturing growth has slowed for the last three months, with the index dropping about 5 points from the 60.4 reading in April that was the fastest growth rate in six years. The slowdown is consistent with an overall easing in the economic recovery, said Paul Dales, an economist with Capital Economics.

"July's ISM survey provides further evidence of what we have been expecting all along; a fading of the economic recovery in the second half of this year and into next year, but no second recession," he said in a note to investors.

The employment section of the index reported a jump in hiring in the industry, which is an optimistic sign for the economy overall, said Dan Meckstroth, chief economist with the Manufacturers Alliance/MAPI .

Uncertain about the recovery, firms have been reluctant to boost their hiring and, instead, have been increasing hours or productivity in other ways. A boost in manufacturing jobs likely means that firms are confident there will be a lot of new orders in the pipeline, Meckstroth said.

The report brought two other encouraging signs: exports are growing faster than imports, and inventories expanded in July after contracting for the previous three months.

Meckstroth expects to see stronger overall growth in August in the machinery and high-tech sectors, as factories use their extra cash to make selective improvements to their equipment to further increase productivity.

The ISM index reflects the number of people who say economic conditions are better, compared with those who say conditions are worse.

While the index can paint a picture of broad trends, some analysts warn that because it stems from a survey, the index can be subjective.