The ISM manufacturing decreased to 55.5 in July, below June's 56.2 but above our and consensus forecasts of 54.0. The new orders index dropped to 53.5 from 58.5, and production fell to 57.0 from 61.4, each the lowest print in a year.

The supplier deliveries index moved higher to 58.3 from 57.3, and the inventories index jumped to 50.2 from 45.8, though this might reflect some unwanted inventory buildup from slowing sales. The employment index increased to 58.6 from 57.8, showing that while activity has moderated over the past couple of months, payroll growth has continued.

Outside of the five components of the headline index, the new export orders index edged higher to 56.5 from 56.0, while imports sank to 52.5 from 56.5. The prices index increased to 57.5 from 57.0.

Overall, this is a mixed report. The drop in the new orders index indicates further slowing in demand growth, and the decrease in the production index shows that this has fed through to activity.

The strength in the employment index is encouraging, however, as it suggests that the broad trend of labor market improvement has continued unscathed through the slowing in production.

Nicholas Tenev wrote in a Barclays Capital Research report.