U.S. manufacturing activity cooled in July, while businesses remained optimistic about their business conditions.

The manufacturing index, also known as the purchasing managers index (PMI), registered 56.3 in July, down from June's reading of 57.8, the Institute for Supply Management (ISM) said in a report on Monday.

A reading above 50 indicates the sector is generally expanding, while a reading below that level indicates contraction.

The new orders index dropped 3.1 points from the previous month to 60.4, production index fell 1.8 points to 60.6, and the employment index also went down 2 points to 55.2.

Of the 18 manufacturing industries, only apparel, textile mills and petroleum and coal product recorded contraction in July.

"Comments from the panel generally reflect expanding business conditions, with new orders, production, employment, backlog and exports all growing in July compared to June, as well as supplier delivers slowing (improving) and inventories unchanged during the period," said the report.

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