Germany's manufacturing sector continued its decline in July, with the PMI data showing accelerated drops in output, new orders, and employment. The headline PMI fell from 43.5 in June to 43.2 in July, marking the sharpest deterioration in business conditions since April. This 25-month streak of sub-50 readings is the longest since 1996, signalling prolonged contraction.

Despite stabilizing prices, input costs fell modestly due to higher freight rates offsetting lower raw material prices. The most significant factor behind the PMI drop was a sharp reduction in output, with the contraction rate increasing over the past two months. Weak demand persisted, particularly in the construction sector, causing new orders to fall sharply, marking the largest decline in three months.

Export orders also fell, albeit at a slower pace than domestic orders. Manufacturers reduced purchasing activity significantly, attempting to deplete their stockpiles, resulting in one of the steepest declines in purchases since the 2008/9 financial crisis. Post-production inventories also decreased.

Lastly, manufacturers revised their growth forecasts downward, with expectations hitting a three-month low and falling below the long-run average, reflecting diminished optimism about future growth.

No revisions are expected to the flash report leaving the sector PMI at a lowly 42.6, down from June's final 43.5.

The Manufacturing Purchasing Managers' Index (PMI) provides an estimate of manufacturing business activity for the preceding month by using information obtained from a representative sector survey incorporating around 500 companies. Results are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) activity versus the previous month and the closer to 100 (zero) the faster is activity growing (contracting). The data are released by S&P Global.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the ISM manufacturing index in the U.S. and the Markit PMIs elsewhere, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.

The S&P Global PMI manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. And its sub-indexes provide a picture of orders, output, employment and prices.