United States: ISM manufacturing index eases to two-and-a-half-year low in June on flat new orders
July 1, 2019
The Institute for Supply Management (ISM) manufacturing index fell from 52.1 in May to 51.7 in June, the lowest reading since November 2016. Nevertheless, the index exceeded market expectations of 51.1 and remained above the 50-point threshold that separates expansion from contraction in the sector, where it has been for 34 consecutive months.
The softer headline reading in June came largely on the back of stalled new demand, as new export orders barely grew while overall new orders were flat, indicating weakening demand in the domestic market. Nevertheless, a solid uptick in output growth supported the headline reading, as did an increase in job creation in the month. Due to the ramp-up of production in the face of stagnant demand, firms continued to clear their backlogs of work, at a robust yet marginally slower pace than in May.
On the supply side, imports stabilized after contracting in the past months, while supplier delivery times increased only slightly, indicating easing pressures on manufacturers’ supply chains and markedly contrasting the situation observed up until the end of last year. Meanwhile, inventories of inputs contracted for the first time in 18 months, suggesting softer demand conditions were starting to translate into reduced buying activity and efforts to control costs. This was also hinted at by a sizable contraction of input prices compared to May. Lastly, customers’ inventories continued to contract at a sharp rate, though slightly slower than the previous month.
Commenting on this month’s reading, researchers at Nomura noted that the June ISM report “is consistent with our view that manufacturing activity continues to ease at a steady pace as opposed to falling sharply. Today’s reading will likely provide Federal Reserve policymakers with some assurance that overall economic momentum, while softer than last year, remains relatively steady.” However, they also remarked that “the easing of the new orders index to a neutral level indicates that the slowdown of industrial activity has yet to bottom and points to further moderation in manufacturing sector output” in the coming months.
Furthermore, the medium-term outlook remains fraught with uncertainties, as the Nomura team argued, notably on the trade front. For instance, they noted that this month’s survey respondents “expressed concern about US-China trade tensions and potential Mexico tariffs despite the US and Mexico resolution in early June. These comments suggest that while the immediate threats of tariffs on imports from Mexico have been averted, businesses are cognizant of the lingering possibility of potential re-escalation. […] Moreover, uncertainty remains high for the US-China trade relationship. Although Presidents Trump and Xi agreed to resume trade negotiations at the G20 summit, there is little evidence that any substantive progress had been made to bridge the gaps on key, long-standing issues.”
Author: Joffrey Simonet, Economist