June manufacturing output falls with growth still intact

Following a slight May gain, June manufacturing output fell, while remaining on the right side of growth, according to the most recent edition of the Manufacturing Report on Business, which was issued today by the Institute for Supply Management (ISM).

The report’s key metric, the PMI, came in at 53.0 (a reading of 50 or higher indicates growth), for a 3.1% decrease compared to May’s 56.1 reading, marking the 25th consecutive month of growth, at a faster rate, as well as the 25th consecutive month of overall economic growth.

June’s PMI reading is 5.2% below the 12-month average of 58.2, also marking the lowest reading over the last 12 months and also the lowest going back to June 2020’s 52.4. The high over that period is October’s 60.8.

ISM reported that 15 manufacturing sectors reported growth in June, including: Apparel, Leather & Allied Products; Textile Mills; Printing & Related Support Activities; Computer & Electronic Products; Machinery; Electrical Equipment, Appliances & Components; Primary Metals; Nonmetallic Mineral Products; Plastics & Rubber Products; Transportation Equipment; Fabricated Metal Products; Miscellaneous Manufacturing; Petroleum & Coal Products; Food, Beverage & Tobacco Products; and Chemical Products. The three industries reporting contraction in June compared to May are: Paper Products; Wood Products; and Furniture & Related Products.

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

•New orders, which are commonly viewed as the engine that drives manufacturing, decreased 5.9%, to 49.2 contracting after 24 months of growth, with eight sectors seeing gains;

•Production, at 54.9, increased 0.7%, growing, at a faster rate, for the 25th consecutive month, with 10 sectors seeing gains;

•Employment, at 47.3, fell 2.3%, contracting, at a faster rate, for the second straight month, with nine sectors seeing gains;

•Supplier Deliveries, at 57.3 (a reading above 50 indicates contraction), slowed at a slower rate, for the 76th consecutive month, with 14 sectors reporting slower deliveries;

•Backlog of orders, at 53.2, growing, at a slower rate, for the 24th consecutive month;

•Inventories, at 56.0, were essentially flat, up 0.1%, growing, at a faster rate, for the 11th consecutive month;

•Customer inventories rose 2.5%, to 35.2, slowing for the last 69 months; and

•Prices fell 3.7%, to 78.5, increasing, at a slower rate, for the 25th consecutive month.

Comments submitted by the ISM member respondents highlighted various themes, including: high backlog and a slowing of incoming orders; high inventories; and material availability issues, among others.

In an interview, Tim Fiore, Chair of the ISM’s Business Survey Committee, described the June report as “complicated,” in that inputs for consumption and demand, moved in the right direction towards equilibrium, with supplier deliveries, while tailing off in what he called the proper tension range.
“Prices are coming down slowly but surely, which is good, as you cannot run on these elevated prices forever, and are causing the Fed to do things that have people concerned,” he said.

On the consumption side, he said seasonality factors drove down production somewhat from its preferred range of 58-to-60, because there are still issues in keeping workers on factory floors.

“Companies are still hiring but what has markets concerned is that demand fell off, with contraction in new order levels and as a result of that you see backlog of orders coming down, because without growth in new orders, you are going to consume your backlog,” he explained. “This is the fourth month of this overordering impact. Buyers are still sitting there with excessively long lead times as prices are coming down. Whatever is happening on the new orders side is happening so far out in the order books that it is not an issue. I am looking for lead times to come down around 5%.”

On the employment front, Fiore said that manufacturers would not be hiring people if they were concerned about laying them off in September or even January, adding that by continuing to hire, the manufacturing community is saying that whatever is happening on the new orders and demand side is not viewed as pertinent to the near-future over the next six-to-12 months.

“It is really just adjusting for excessively long lead times in new order books, with buyers now pausing, making those lead times come down,” he said. “And prices are moving in the right direction, too, with decreases happening, which everyone wants. Demand is not being destroyed in manufacturing at the moment.”

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