Report On Business® Roundup: June Manufacturing PMI®
In the history of the Manufacturing ISM® Report On Business®, and especially in the COVID-19 era, there have been stretches where month-to-month index readings in graph form would resemble an electrocardiogram result.
That’s important context for the lengthy slump in U.S. factory activity as measured by the Manufacturing PMI®, which registered 48.5 percent in June, in contraction territory for the third straight month and 19th in the last 20. It’s been an arduous hike, but the valley was a reading of 46.4 percent in June 2023 and a peak of 50.3 percent in March.
On a graph, that’s a straight line in comparison to more volatile index activity. And there’s something to be said for stability, Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® Manufacturing Business Survey Committee, told a conference call of reporters on Monday: “Stable is not a bad place to be,” he said.
However, in continuing the letter “S” theme from the May data, in this case, stable also means stuck. And many of the critical dynamics that factor into the PMI®, especially companies’ investment in employment and inventories, aren’t likely to budge much until demand picks up and/or the U.S. Federal Reserve (Fed) provides interest-rate relief.
ISM manufacturing index falls to 48.5 from 48.7. Price index comes in at 52.1 vs 57.0 last month with new orders index at 49.3 vs 45.4. Employment index 49.3 down from 51.1. Overall - a soft report for manufacturing.
— Kathy Jones (@KathyJones) July 1, 2024
That’s especially true, Fiore said, of three of the largest and most capital spending-intensive industries in the manufacturing sector: Machinery, Fabricated Metal Products and Transportation Equipment. All three industries contracted in June, with Machinery and Fabricated Metal Products both recording a PMI® below 45 percent.
“Those are industries that sell directly to customers, and Fabricated Metal Products is a ‘feeder’ for all of the other industries, much like Chemical Products,” Fiore said. “Those three are hurting, and a big reason is because people are unwilling to invest.”
And that stagnation has been felt in production levels, which had been resilient in recent months, particularly as companies worked off backlogs. But with demand sluggish and backlogs pared down, the Production Index registered 48.5 percent in June, down 1.7 percentage points. Less production equals less revenue.
Still, there are no blinking red lights in the June data, though Fiore called the Inventories Index reading of 45.4 percent, a 17th straight month in contraction, a yellow light. “It’s companies saying they’re not going to invest in working capital until they are convinced there will be a growth profile, and at this point, it’s not happening,” he said.
The same could be said for human capital, but it’s holding steady. The Employment Index dropped into contraction in June with a reading of 49.3 percent, but Fiore noted that the panelists’ comments favored hiring over staff reductions by a 1.3-to-1 ratio. Also, there have been no widespread layoffs.
“That would be the quickest and easiest way to get expenses down, so it’s a positive for demand projections that companies are not panicking and laying off,” said Fiore, who noted signs of flickering demand like the New Orders Index, which remained in contraction but was up 3.9 percentage points in June, to 49.3 percent.
Manufacturing employment fell back into contraction in June highlighting some of the weakness we’re starting to see more broadly in cyclical sectors.
— Don Johnson (@DonMiami3) July 1, 2024
The trend for the last 2 years in the ISM (and other data) has been weakening employment, while job openings fall swiftly.
Another encouraging reading was the Prices Index, which at 52.1 percent has dropped 8.8 percentage points in two months. The June reading was consistent with not only Friday’s federal personal consumption expenditures index reading for May, Fiore said, but also ISM’s Spring 2024 Semiannual Economic Forecast, in which panelists projected a slight increase in prices through the end of the year.
Finally, the Computer & Electronic Products industry is close to expansion, Fiore said: “That would be a big deal. It’s been in the doldrums for some time.”
But across the manufacturing sector, demand must pick up. And the interest-rate dynamic that was considered a tailwind at the start of the year continues to be a headwind as companies await action from the Fed. “Without some fairly significant rate reduction, I don’t expect a change in trajectory in the next three months,” Fiore said. “I don't think anybody’s thinking about a rate cut until September, so ‘stuck’ is where we’re going to be.”
The Report On Business® roundup:
Bloomberg: U.S. Factory Activity Shrinks for Third Month as Prices Moderate. “The figures indicate U.S. manufacturing continues to struggle for momentum due to high borrowing costs, restrained business investment in equipment and uneven consumer spending as the Federal Reserve keeps interest rates higher for longer.”
CNBC: ISM Manufacturing Index Misses Forecast. “Now, 52.1 percent is the reading for (the Prices Index), which of course we like to look at in reverse,” analyst Rick Santelli said. “Normally, we like higher numbers; in this case, we rot for lower numbers. Following 57 percent (in May), 52.1 percent is the smallest prices number of the year.”
Mace News: Manufacturing in Contraction for Third Straight Month as Demand Remains Weak amid High Interest Rates. “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.”
Manufacturing Dive: Manufacturing is ‘Stuck’: June PMI®. “Similar to recent months, Fiore blamed much of the stagnation on the Federal Reserve’s decision not to cut interest rates. Such a move isn’t expected to happen until at least September, he noted, leaving many companies cautious to invest in production, a worrying sign of the industry’s capacity to grow in the short term.”
Consistent with construction spending being soft for the month of June (ISM Manufacturing commentary). $iwm $len $dhi pic.twitter.com/aQrWOmYM5f
— James Mclaire (@JamesMclaire) July 1, 2024
MarketWatch: Manufacturers Are Mired in a Slump, ISM Finds, and Aren’t Adding Much to the U.S. Economy. “The industrial side of the economy is in a rut. It’s probably not going to get out of one until interest rates fall and customer demand snaps back for big-ticket items such as appliances and new cars.”
Reuters: U.S. Manufacturing Extends Slump; Inflation Pressures Easing. “Commentary from manufacturers was mostly downbeat. Makers of chemical products reported a ‘high volume of customer orders.’ Transportation equipment manufacturers, however, complained that ‘customers continue to cut orders with short notice, causing a ripple effect throughout lower-tier suppliers.’ Makers of electrical equipment, appliances and components reported that "customers (were) ordering more to create buffer stocks, in case of future shortages.’ ”
ISM’s Services PMI® will be unveiled on Wednesday, and the Hospital PMI® on Friday. For the most up-to-date content on the reports under the ISM® Report On Business® umbrella, use #ISMPMI on X, formerly known as Twitter.
(Photo credit: Getty Images/Gorodenkoff)