–ISM Manufacturing Index Dips to 48.5 from 48.7 in May, Below Median Forecast of 49.1
–ISM’s Fiore: Biggest Concern in June Report is over Falling Production
–Fiore: Employment Unlikely to Expand Without Significant Pickup in Demand
–Fiore: Manufacturing Still ‘Stable’ During Summer Months When Activity Slows Down
By Max Sato
(MaceNews) – U.S. manufacturing activity was in contraction for a third straight month in June on continued weak demand as industries sensitive to high interest rates are reluctant to invest in capacity, laying off employees and trimming inventories despite slight easing in costs, data from the Institute for Supply Management released Monday showed.
The sector index compiled by the ISM, which shows general direction, edged down 0.2 percentage point to a four-month low of 48.5, the 19th contraction in the past 20 months, after dipping 0.5 point to 48.7 in May, falling 1.1 points to 49.2 in April and rising 2.5 points to 50.3 in March. It was below the median economist forecast of 49.1.
“Demand remains subdued, as companies demonstrate an unwillingness to invest in capital and inventory due to current monetary policy and other conditions.,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement. “Production execution was down compared to the previous month, likely causing revenue declines, putting pressure on profitability. Suppliers continue to have capacity, with lead times improving and shortages not as severe.”
Industries that are particularly sensitive to borrowing costs — producers of machinery, fabricated metals and transportation equipment — are suffering from the Federal Reserve policy to maintain restrictive interest rates to bring inflation back to target, Fiore told reporters. On the upside, computer and electronic products industry is getting closer to the neutral line while chemical firms, which supply their products to many industries, “continue to do very well,” he said.
Fiore also told reporters that the biggest concern is over falling production, and that he does not expect employment to expand in the near term “without some pretty significant increase in demand.”
He stuck to his remarks made last month that the ISM’s main index was now in a lower range of 47 to 51, down from 49 to 53 seen earlier this year, amid concerns over an economic slump in the absence of a rate cut by the Federal Reserve. He continued to say that the manufacturing sector is “stable” without a Fed rate cut during the summer months of June, July, August, when activity slows down seasonally.
Among the five subindexes that directly factor into the manufacturing PMI, the new orders index rose 3.9 points to 49.3 in June after slumping 3.7 points to a 12-month low of 45.4 in May (the weakest since 42.9 in May 2023), but was below the neutral line of 50 for the third straight month. The production index slipped back into contraction territory after three months of growth. It fell 1.7 points to 48.5 in June after dipping 1.1 points to 50.2 in May.
The employment index showed an eighth month of contraction in the past 12 months, sliding 1.8 points to 49.3 in June after rising 2.5 points to 51.1 in May and climbing 1.2 points to 48.6 in April. “Panelists’ comments in June indicated a marginal decline in staff reductions compared to May, supported by the approximately 1.3-to-1 ratio of hiring versus head-count reduction comments,” Fiore said but added that some firms are still laying off workers to cope with weak demand.
The delivery performance of suppliers to manufacturers was “faster” for the fourth consecutive month. The supplier deliveries index rose 0.9 point to 49.8 but remained just below 50 after being unchanged at 48.9 in May. This is the only ISM subindex that is inversed; a reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases. The manufacturing inventories index contracted for 17 months in a row. It fell 2.5 points to a four-month low of 45.4 in June after slipping 0.3 point to 47.9 in May.
Among other subindexes, the prices paid index indicated growth for the sixth month in a row after showing the first increase in nine months in January but the index fell 4.9 points to a six-month low of 52.1 in June after dipping 3.9 points to 57.0 in May and surging 5.1 points in April to 60.9, which was the highest since 78.5 recorded in June 2022. “Commodity prices continue to be volatile, especially fuel, natural gas, aluminum and plastics,” Fiore said. “Steel prices are approaching long-term historical lows.” In June, 20% of companies reported higher prices, down from 26% in May, which is “a clear improvement,” he said.
The customers’ inventories index showed contraction for the seventh straight month. It fell 0.9 point to 47.4 in June after rising 0.5 point to 48.3 in May, the highest since 50.8 in November 2023. The move among customers to trim their inventories is “considered neutral for future new orders and production,” Fiore said.
The backlog orders index stayed below 50, and thus in contraction, for 21 months in a row amid sluggish new orders after 27 months of expansion. It fell 0.7 point to a seven-month low of 41.7 after dropping 3.0 points to 42.4 in May. It slumped 5.6 points to 37.5 in May 2023, which is the lowest since the Great Recession (33.6 in February 2009).
The new export orders index fell 1.8 points to 48.8 in June after rising 1.9 points to 50.6 in May and slipping back into contraction in April, when it fell 2.9 points to 48.7. It had surged 6.4 points to 51.6 in February for the highest since 52.6 in July 2022.
The ISM main index had been on a downtrend since it fell 2.7 points to 53.4 in June 2022 but it seems to have hit a bottom in June 2023 at 46.4, the lowest since May 2020, when the index at 43.5 was recovering from a recent low of 41.8 the previous month during the first wave of the pandemic. The pandemic high was 64.0 recorded in March 2021. The all-time low is 29.4 hit in May 1980.
To assess the overall economic climate, the latest ISM survey indicates the overall economy grew for the 50th straight month after one month of contraction in April 2020. The ISM’s manufacturing PMI reading above 42.5, over time, generally indicates an expansion of the U.S. economy. The June survey showed that 62% of manufacturing gross domestic product contracted, up from 55% in May.
The manufacturing sector is in the sixth contracting phase in the past 20 years. Previously, the ISM manufacturing PMI posted contraction just before the pandemic hit the global economy, from August to December 2019, and from March to May 2020. The deepest slump in the past two decades was recorded from September 2008 until July 2009 (the bottom was 34.5 in December 2008) triggered by the U.S. credit crisis.
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