United States PMI June 2018

United States

United States: ISM manufacturing index points to strong upward momentum in June, but capacity stress starts to show amid recent tariffs

July 2, 2018

The U.S. manufacturing sector kept growing at a quick pace in June, fueled mainly by an exceptionally robust domestic economy, and by strong growth in both domestic and export orders. The Institute for Supply Management (ISM) manufacturing index increased to 60.2 in June, up from 58.7 in May and beating analysts’ expectations of 58.5. The index remained comfortably above the 50-point threshold that separates expansion from contraction in the U.S. manufacturing sector, where it has been for 22 consecutive months.

The pick-up in June came largely on the back of an acceleration in growth of export orders and output, coupled with a sharp increase in imports and supplier delivery times, a strong signal that the manufacturing sector is running at full tilt. It should, however, be noted that while the new export orders index rose in the month, the index for (overall) new orders declined slightly, which indicates that domestic demand growth—while still very strong—is showing signs of decelerating. Employment growth also moderated marginally in June, which some respondents attributed to the extremely tight labor market, notably reporting difficulties in filling blue-collar positions. Lastly, backlogs of orders kept growing in the month, but at a noticeably slower pace than in May. Taken together, these indicators suggest that momentum in the domestic economy may be reaching its apex, as the additional uncertainty caused by U.S. trade policy in recent months is expected to provide some headwinds to growth going forward.

Robust and accelerating growth in export orders, coupled with a surge in import growth, signals that recent tariffs have not yet put a dent in underlying demand, and may suggest that manufacturers in June were attempting to stockpile raw materials before additional tariffs between the U.S., Canada and China take effect on 6 July, increasing input price pressures. Although it moderated in the month, the index for raw materials prices remained extremely elevated, with notable cost pressure being reported on metals and related products, as a result of the U.S. steel and aluminum tariffs. On top of this, lead time for supplier deliveries increased the most in over 14 years, as many respondents reported shortages of available trucks—which also contributed to higher input costs—and materials.

All in all, the manufacturing sector in June showed increasing signs of severe capacity constraints, which could put a ceiling on growth going forward. Shortages of inputs and labor, as well as supply chain disruptions were among the most often mentioned concerns of survey respondents. Even more notably, the issues generated by tariffs and a rapidly deteriorating trade environment seemed to be a primary strategic concern for most of the survey’s participants. The tariffs and related uncertainty were seen as responsible for disrupting strategic planning, and leading to higher cost pressure, business instability, and lower investment growth. Responses also indicated trade-related disruptions were already starting to impact production decisions, with one respondent noting:

“We are preparing to shift some customer responsibilities among manufacturing plants and business units due to trade issues (for example, we’ll shift production for China market from the U.S. to our Canadian plant to avoid higher tariffs).”

FocusEconomics Consensus Forecast panelists expect industrial production to increase 3.4% in 2018, which is unchanged from last month’s forecast. In 2019, panelists see industrial production expanding 2.2%.

Author:, Economist

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United States PMI Chart

USA PMI June 2018 0

Note: Composite index in the Manufacturing Report on Business (PMI). Readings above 50% indicate an expansion in the manufacturing sector while readings below 50% point to a contraction.
Source: Institute for Supply Management.

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