Manufacturing activity shifted into neutral in July, with the Institute for Supply Management (ISM) Purchasing Managers’ Index (PMI) falling from 55.3 in June to 50.9 in July. This mirrors many of the regional surveys, which saw a mild rebound in June reversed. For the first four months of this year, the PMI was above 60, indicating strong growth, but manufacturing activity since then has slowed down considerably.

The silver lining in these numbers — if there is one — is that the PMI remained above 50, its threshold for expansion, but only barely. The indices for production, supplier deliveries, and employment fell, but also remained over 50. New orders and inventories contracted, with their measures for July coming in at 49.2 and 49.3, respectively.

New export orders edged slightly higher, but remain below the growth rates of early spring. The respondent comments tended to echo this, with individuals citing strong growth overseas (particularly in Asia) helping to offset weaker sales domestically.

Pricing pressures eased, but continue to grow. This is welcome news, especially since the dramatic increases in raw material prices have been such a challenge to so many manufacturers over the past year.

Overall, this report shows that manufacturing output is off to a slow start in the third quarter. Weaknesses in the spring centered around supply disruptions, rising energy and commodity prices, a weak labor market, and rising consumer and business anxiety. The fact that we continue to experience flat growth in output shows that many of these headwinds persist. The stalemate over the budget deficit situation has not helped, only adding new levels of uncertainty to the equation.

Manufacturers have tended to be more optimistic about the next six months than when asked about the current environment, and there have been some positive signs of recovery in the sector which can hopefully bear some fruit. If we are going to see the economy move out of neutral we will need to see a stronger manufacturing sector, and we can hope that August and September start to revive production activity for a better second half of 2011.

Chad Moutray is chief economist, National Association of Manufacturers.