Manufacturing output slides again in June, reports ISM

The ongoing run of manufacturing declines continued in June, with output falling for the third consecutive month, according to the new edition of the Manufacturing Report on Business, which was issued today by the Institute for Supply Management (ISM).

The report’s benchmark reading, the PMI, came in at 48.5 (a reading of 50 or higher indicates growth), down 0.2% from May’s 48.7, which was down 0.5% from April’s 49.2. April was off 1.1% compared to March’s 50.3 reading. March saw growth after a 16-month stretch of contraction—that was preceded by a stretch of 28 consecutive months of growth. ISM added that with May down, the PMI has contracted, at a faster rate, for three straight months, with the PMI not seeing growth in 19 of the last 20 months, with the overall economy growing, at a slower rate, for the 50^th consecutive month.

The June PMI is 0.4% above the 12-month average of 48.1, with March’s 50.3 marking the high over that period, and July 2023 marking the lowest, at 46.5.

ISM reported that seven manufacturing sectors saw growth in June, including: Printing & Related Support Activities; Petroleum & Coal Products; Primary Metals; Furniture & Related Products; Paper Products; Chemical Products; Miscellaneous Manufacturing; and Nonmetallic Mineral Products. Sectors seeing contraction included: Textile Mills; Machinery; Fabricated Metal Products; Wood Products; Transportation Equipment; Plastics & Rubber Products; Food, Beverage & Tobacco Products; Electrical Equipment, Appliances & Components; and Computer & Electronic Products.

The report’s key metrics were mostly down in June, including:

• New Orders, which are considered the engine that drives manufacturing, increased 3.9%, to 49.3, contracting, at a slower rate, for the third consecutive month, with six sectors reporting growth;
• Production, at 48.5, down 1.7%, contracting after growing for three straight months, with eight sectors reporting growth;
• Employment, at 49.3, down1.8%, contracting after growing in May, which was preceded by seven months of contraction, with five sectors reporting growth;
• Supplier Deliveries, at 49.8 (a reading above 50 indicates contraction), were up 0.9% compared to May, growing faster, at a slower rate, for the fourth consecutive month, with four sectors reporting slower deliveries;
• Backlog of Orders, at 41.7, down 0.7%, contracting, at a faster rate, for the 21^st consecutive month, with one sector reporting growth;
• Prices, at 52.1, down 4.9%, increasing, at a slower rate, for the sixth month in a row;
• Inventories, at 45.4, were off 2.5%, contracting, at a faster rate, for the 17^th consecutive month, with four sectors reporting higher inventories; and
• Customers’ Inventories, at 47.4, down 0.9%, moving “too low,” at a faster rate, for the seventh consecutive month, with seven sectors reporting higher customers’ inventories

Comments submitted by the ISM member panelists again highlighted various themes related to the economy and market conditions.

A Transportation Equipment panelist explained that customers continue to cut orders with short notice, which is causing a ripple effect throughout lower-tier suppliers. And a Miscellaneous Manufacturing panelist noted that the level of production is lower due to decreased demand for products.

Tim Fiore, Chair of the ISM's Manufacturing Business Survey Committee, said in an interview that while the May PMI did not come in on the right side of 50, there are some positive takeaways in the report.

For example, Fiore said that when removing seasonal factors out of three of the four index metrics that get adjusted—New Orders, Production, and Employment—those readings would all be “very close” to the desired 50 mark, which is positive.

“The inventory number, at 45.4, is a little bit of a surprise, as sometimes when a quarter or six-month period is closed, that number does not really drop over the last month of a quarter,” he said. “We [usually] see a drop in the following month. It's really a function of buyers having the knowledge of how much inventory they really received through that month and how much has been shipped. They don't really know that at the time they report to us, there is sometimes a lag. I think that inventory number is just representative of the fact that people are cautious about any investments.”

For either a public or private business, Fiore explained that the end of a quarter is always a measurement period, which makes companies very cautious.

On the spending side, with Prices coming in at 52.1, Fiore said that is consistent with ISM’s Semiannual Forecast estimate made in May, in which it called for 1.9% price growth in 2024, with 1.6% already baked in year-to-date, with only another 0.03% worth of growth for the second half of the year, with that tally expected to come to fruition.

Looking at the less-optimistic side, Fiore said that the 48.5 Production reading had a 2.5% seasonal impact and would have been expanding, if not for the seasonality adjustments.

“But the seasonal adjustment is there for a reason,” he said. “June is usually a pretty strong manufacturing month, and we weren't able to really meet the seasonal goals, so that's why we contracted. I've been saying that as long as production/revenue stays above 50, then the profitability of our panelists is fine. They're OK, and they can wait it out, but once that number falls below 50, essentially, when they've run out a backlog to work on, then things tend to get a lot hairier. So, we could be at that cusp, or turning point, in that month of June. We'll have to see what July brings. But that if number continues to drop, that's going to precipitate an employment number dropped dropping, too, which hurts the PMI.”