US factory activity slows to two-year low in June

Autonomous robots assemble a Model X SUV at BMW’s manufacturing facility in Jarir, South Carolina, US, November 4, 2019. REUTERS/Charles Mostoller

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  • The ISM manufacturing index fell 3.1 points to 53.0 in June
  • New orders, contract staffing metrics

WASHINGTON (Reuters) – U.S. manufacturing activity slowed more than expected in June, with a gauge of new orders shrinking for the first time in two years, in signs the economy is slowing amid a severe monetary policy tightening by the Federal Reserve.

Friday’s survey by the Institute of Supply Management (ISM) also showed a gauge of factory hiring contracting for the second month in a row, although the “vast majority” of companies indicated they were hiring.

The slowdown in manufacturing followed moderate growth in consumer spending in May as well as weak housing starts, building permits and factory production, leaving some economists expecting the economy to contract again in the second quarter after GDP fell in the first. Three months a year.

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“Investment spending is starting to weaken, which only adds to the evidence that the US economy is slowing rapidly,” said Shannon Serry, an economist at Wells Fargo in New York.

The ISM’s survey of national factory activity fell to 53.0 last month, the lowest reading since June 2020, when the sector was rebounding from the COVID-19 downturn. This came after a reading of 56.1 in May. A reading above 50 indicates expansion in manufacturing, which accounts for 11.8% of the US economy.

Economists polled by Reuters had expected the index to fall to 54.9. Some moderation in factory activity reflects a shift in spending on services from goods.

All six of the largest industries — computer and electronic products, machinery and transportation equipment, petroleum and coal products, and food and chemical products — posted moderate to strong growth.

The Fed last month raised its policy rate by three-quarters of a percentage point, its biggest rise since 1994, to quell high inflation. An interest rate hike of the same size is expected in July. The US central bank has raised its benchmark overnight interest rate by 150 basis points since March.

The forward-looking new orders sub-index in the ISM survey fell to 49.2 from a reading of 55.1 in May. This was the first drop in the index below the 50 level since May 2020.

US stocks are trading lower. The dollar rose against a basket of currencies. US Treasury bond prices were higher.

lightened orders

The ISM survey showed that slow demand growth was a recurring theme among most companies, with only a few, including manufacturers of transmission and electrical equipment and makers of hardware and components, saying that demand remained strong.

Food producers reported that “business is slower than expected in terms of volume,” although they were “already receiving large orders this fall.” “Our suppliers are experiencing a softening in orders,” the machine makers said.

However, manufacturers have a lot of work on hand to keep factories thriving. Backlog of orders continued to accumulate at a steady pace in June.

Although business inventory was revised sharply in the first quarter, and major retailers such as Walmart (WMT.N) and Target (TGT.N) reported carrying a lot of merchandise, the ISM survey still viewed customers’ inventories as “Too low.”

Manufacturers of apparel, leather and similar products acknowledged the existence of excess inventory held by their customers and said they “expect lower orders in the coming months until stocks are properly adjusted against demand”.

Some economists saw the strong inventory buildup in the last quarter as a sign that supply chain bottlenecks were easing.

In fact, the ISM survey’s measure of supplier delivery slipped to 57.3 from 65.7 in May. A reading above 50% indicates slower factory deliveries.

“This loosening of the supplier delivery index may be related to reduced supply chain issues but also to weaker demand,” said Daniel Silver, an economist at JPMorgan in New York.

The inflation news was encouraging. The measure of prices paid by manufacturers fell to a reading of 78.5 from 82.2 in May, supporting the view that inflation has likely peaked.

A combination of falling demand and a shortage of workers is likely to bring the survey’s gauge of factory employment down to a reading of 47.3 from 49.6 in May. Technology companies such as Tesla (TSLA.O) have laid off workers.

With 11.4 million job vacancies across the economy at the end of April, economists are warning against reading persistent weakness in factory employment as a sign of faltering overall job growth.

“Purchasing managers say they are cutting staff, but layoffs haven’t affected the weekly jobless benefits data yet,” said Christopher Robke, chief economist at FWDBONDS in New York. “The employment index was below 50 last month as well, yet the manufacturing sector’s non-farm payrolls rose in May by 18,000.”

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(cover) Lucia Mutikani Editing by Paul Simao

Our Standards: Thomson Reuters Trust Principles.

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