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The US ISM Manufacturing Index rose in July to 54.2. Details paint a brighter picture than previous months, but headwinds remain that will keep a full rebound a ways off, explained analysts at Wells Fargo. 

Key Quotes: 

“The industrial sector’s recovery picked up steam in July, with the ISM manufacturing index climbing up to 54.2. That was a bit better than expected and marked the highest reading in more than a year.”

“A look at the headline’s sub-components show the underlying shape of the sector is improving a bit more rapidly. The production index rose nearly five points to 62.1 in July, and should stay strong at least in the immediate future with the new orders index notching a similar gain to land at 61.5.”

“Inventories also weighed on the headline, but for the right reason as activity rebounded quickly last month. The inventory index, which is also included in the headline’s composite reading, was consistent with the fastest drawdown in inventories since March.”

“With depressed global growth, high unemployment and a resurgent virus, the sector continues to face strong headwinds. That said, manufacturers may be poised for a relatively quick recovery compared to services in this particular cycle. The need to limit close contact will weigh unusually heavily on services activity, whereas manufacturing could benefit from a higher share of consumer spending going to goods even as capex remains weak.”