June manufacturing ends first half of 2019 with growth, at a reduced rate

The first half of 2019 saw manufacturing output end up on the right side of growth, albeit at lower levels than at the beginning of the year, according to the most recent edition of the Manufacturing Report on Business issued by the Institute for Supply Management (ISM) today.

The report’s key metric, the PMI, dipped 0.4% to 51.7 (a reading of 50 or higher indicates growth), following 0.7% and 2.5% declines in May and April, respectively. The index has seen growth for 34 consecutive months, with the over all economy now having grown for 122 consecutive months. The June 2019 PMI is 4.3% below the 12-month average of 56.0, with June’s marking the lowest reading during that span and is also the lowest PMI reading going back to October 2016.   

ISM reported that 12 of 18 manufacturing sectors reported over all growth in June, including: Furniture & Related Products; Printing & Related Support Activities; Textile Mills; Nonmetallic Mineral Products; Food, Beverage & Tobacco Products; Petroleum & Coal Products; Chemical Products; Computer & Electronic Products; Paper Products; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; and Machinery. The five industries reporting contraction in June are: Apparel, Leather & Allied Products; Primary Metals; Wood Products; Transportation Equipment; and Fabricated Metal Products.

The report’s key metrics, including the PMI, were mixed in June.

New orders, which are commonly referred to as the engine that drives manufacturing, slipped 2.7% to 50.0, remaining “unchanged” on the heels of 41 straight months of growth, as customer demand failed to increase for the first time since December 2015’s 49.6, with ten of the 18 manufacturing sectors reporting growth in new orders for the month.

Production, at 54.1, rose 2.8%, growing for the 34th consecutive month and marked the strongest rate of June growth of the PMI’s sub indexes, with 13 sectors reporting growth. This growth helps to counter May’s 51.3 reading, which, while still growing, was the lowest production reading going back to August 2016, when it was at 49.6.

Employment eked out a 0.8% gain to 54.5, growing for the 33rd consecutive month, with 12 of 18 sectors growing. Supplier deliveries at 50.7 (a reading above 50 indicates contraction) was 1.3% lower than May’s 52. ISM said this is the 40th consecutive month of slowing supplier deliveries, with June dropping to its lowest level since September 2016’s 50.2%.

Inventories were off 1.8% to 50.9, showing contraction for the first time since December 2017’s 48.5. ISM said that inventories “were again depleted relative to production due to production-output strength and despite suppliers delivering at a slower rate.”

Respondent comments included in the report again were largely focused on tariffs and trade tension.

A computer and electronic products respondent noted that “China tariffs and pending Mexico tariffs are wreaking havoc with supply chains and costs, the situation is crazy, driving a huge amount of work [and] costs, as well as potential supply disruptions.” And a chemical products respondent said that tariffs re causing an increase in the cost of goods that translates into U.S. consumers paying more for products.

In an interview, Tim Fiore, Chair of the ISM’s Manufacturing Business Survey Committee, said that June represents the third consecutive month of PMI declines, while still growing, which he described as abnormal. But the biggest takeaway, though, according to Fiore, is that demand is flat for the first time since manufacturing began its most recent run of expansion in April 2016.

“It is not just new orders being down, it is also the second straight month of contraction for backlog of orders (at 47.4),” he said. “Production and employment in the supply chain are able to keep up with demand and consume any type of backlog. Customer inventories are at 44.6, with 46 about as high as you want to see it, and new export orders, at 50.5, is generally flat, too.”

These numbers collectively are not good news for demand, explained Fiore, whom noted “that without demand you have nothing else.” But on the positive side, he said that production and employment in the supply chain are more than capable of keeping up. 

“Supply chains are still struggling somewhat, but it is pretty light,” he said. “Suppliers can deliver what they want pretty much, with employment the last indicator to go up and the last to go down and production was solid at 54.1. The manufacturing economy is ready to respond, but where is the demand, is it domestic or global?”

On a global level, he said there are issues everywhere, with China’s PMI below 50, and Europe’s GDP at 1.7, and slowness in Latin America and Japan.

“Global demand is not very good,” he said. “Twelve months into this cycle we had synchronous expansion across all the major economies. “Add the trade tension to that, with the U.S. having a hard time selling product overseas, which makes up 14%-to-18% of manufacturing GDP, and we are struggling with selling it, due to counter tariffs, as well as the strong dollar issue against it. Demand is a problem right now. And prices are again contracting (down 5.3% to 47.9 in June), with a lot of that having to do with steel and aluminum, oil, and natural gas. If the electronics sector was hurting worse than it is, than these numbers may have been down more.”