By Xavier Fontdegloria

Manufacturing activity in the U.S. remained robust in July, but slowed somewhat compared with previous months as supply-chain strains continued to act as a meaningful drag on growth.

The ISM Manufacturing Report on Business PMI fell to 59.5 in July from 60.6 in June, according to data from a survey compiled by the Institute for Supply Management released Monday. Economists polled by The Wall Street Journal expected the index to come in at 60.8.

July's data suggest that the country's factory activity expanded at a solid clip, with four of the five subindexes that form the headline PMI above the 50-point threshold that indicates growth.

Respondents reported that their companies and suppliers continue to struggle to meet increasing demand levels, said Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee.

"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," he said.

Manufacturers have been dealing with these materials shortages for months and could still take time to be fully resolved, economists say.

Demand remained strong in July. The new orders index eased somewhat to 64.9 from 66.0 the previous month, the customers' inventories index edged lower to 25.0 and the backlog of orders increased to a very high 64.5.

The production index cooled to 58.4 from 60.8 in June. The employment index swung to expansion territory, to 52.9 from 49.9 the previous month, signaling payroll growth.

Firms continued to experience difficulties to attract and retain labor, but there were signs of improvement compared with previous months, the report said.

However, worker absenteeism and difficulties in filling open positions continue to be issues limiting the sector's growth potential, it said.

Supply-chain related problems were widespread in July, but some of data showed signs of easing compared with June. The supplier delivery index softened to 72.5 from 75.1.

The inventories index, however, fell to contraction territory to 48.9.

Cost pressures remained high, but cooled somewhat. The prices index edged down to 85.7 from 92.1 the previous month. "Supply and demand dynamics appear to be moving closer to equilibrium for the first time in many months," Mr. Fiore said.

Comments from respondents indicate slight improvements in labor and supplier deliveries offset by continued problems in the transportation sector.

"Sales are above last year by a good percentage, but meeting demand is just not possible due to force majeure situations, logistics, and labor shortages," a respondent from nonmetallic mineral products sector said. "We don't anticipate this ending until well into 2022."

Write to Xavier Fontdegloria at xavier.fontdegloria@wsj.com

(END) Dow Jones Newswires

August 02, 2021 10:42 ET (14:42 GMT)