Manufacturing activity tumbles in June, according to ISM data

While manufacturing has been a constant source of strong economic growth in an economy replete with warning signs, the Institute of Supply Management’s June Manufacturing report on Business released today showed that manufacturing activity for the month was not as strong as it has been over the course of the last three years.

In June, the PMI, ISM’s index used to measure manufacturing activity, was 49.7, which was 3.8 percent below May. A reading of 50 or higher indicates growth is occurring. Economic activity in the manufacturing sector had expanded for 34 straight months prior to June’s contraction and overall economic activity has expanded for 37 straight months. June was also below the 12-month average of 52.6 and marked the first time it had been below 50 since July 2009.

ISM reported that New Orders, which are commonly referred to as the ‘engine’ which drives manufacturing, tumbled 12.3 percent to 47.8, following May’s 60.1, which was its highest level since April 2011. New Orders had not seen this type of drop since October 2001, when it fell 12.4 percent.

Production was down 4.6 percent at 51.0. Employment was down 0.3 percent at 56.6. Even with declines in their respective declines, each of these metrics were in the 50’s, pointing to continued positive growth.

“One data point does not make or break a trend,” said Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, in an interview. “From February through May, we had seen moderate growth, but this is a little different for sure.”

Holcomb added that the decrease in New Orders also leads to declines in Exports, which dipped 6.0 percent in June to 47.5, as well as domestic orders, which are often viewed as big drivers in overall order activity.

Another contributing factor for June’s decline, according to Holcomb, was Inventories, which fell 2.0 percent to 44.0.

“This shows a continuing leanness in inventories, which is not a bad thing necessarily but it is certainly a contributor,” said Holcomb.

Inventories have fallen from 50 in March to 48.5 in April to 46.0 in May to June’s 44.0.

Looking ahead, Holcomb said that while the June data was a surprise to most, it is not out of the question to potentially see July come in with better numbers. The reason for that, he said, is there have been months below 50 before—with the last one occurring in 2007—which have recovered a lot of ground the subsequent month.

“We won’t know how it ended up until later in the month, but we are not getting to nervous about June’s 49.7, and let’s not forget that anything above 42.6 represents expansion in the overall economy, which has now been ongoing for more than 3 years.”

June Prices saw a 10.5 percent decline to 37.0. Holcomb said that in recent weeks the prices of raw materials have gone down 24 percent in the last two months, with this drop-off starting with lower fuel and energy prices and translating pretty quickly into other commodities like resin and fuel products that require a lot of energy to formulate.

Overall, he explained that lower prices can be viewed as good news and bodes well for being able to buy inventories at lower prices, as well as serve as a reflection of demand, which is softening across the board and translating into lower prices.