Manufacturing-Sector Survey Suggests Slowing Growth and Slightly Fewer Price Pressures

The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index fell to 53.0 percent in June, off 3.1 points from 56.1 percent in May (50 is neutral). June is the 25th consecutive reading above the neutral threshold, but the level is down sharply from the March 2021 peak (see first chart). The survey results indicate that the manufacturing sector continues to expand, but demand has softened, and price pressures have eased slightly, though they remained significant. However, survey respondents remained optimistic about future demand.

The Production Index registered a 54.9 percent result in June, a rise of 0.7 points from May (see top of second chart). The index has been above 50 for 25 months, but the six-month average has declined for 15 consecutive months and the June average of 55.6 percent is the lowest since September 2020.

The Employment Index posted a third consecutive decline in June, coming in below the neutral 50 threshold for the second consecutive month. The 47.3 percent reading suggests two months of contracting employment (see top of second chart). The report states, “Despite the Employment Index contracting in May and June, companies improved their progress on addressing moderate-term labor shortages at all tiers of the supply chain, according to Business Survey Committee respondents’ comments. Panelists reported lower rates of quits compared to May. “

The Bureau of Labor Statistics’ Employment Situation report for June is due out on Friday, July 8, and expectations are for a gain of 265,000 nonfarm payroll jobs including the addition of 12,000 jobs in manufacturing.

The new orders index sank 5.9 points to 49.2 percent in June. That is the first reading below neutral since May 2020 (see bottom of second chart). The new export orders index, a separate measure from new orders, fell to 50.7 percent versus 52.9 percent in May. The new export orders index has been above 50 for 24 consecutive months.

The Backlog-of-Orders Index came in at 53.2 percent versus 58.7 percent in May, a 5.5-point decline (see bottom of second chart). This measure has pulled back from the record-high 70.6 percent result in May 2021 but has been above 50 for 24 consecutive months. The index suggests manufacturers’ backlogs continue to rise, but the pace decelerated significantly in recent months.

Customer inventories in June are still considered too low, with the index coming in at 35.2 percent, up 2.5 points from May (index results below 50 indicate customers’ inventories are too low). The index has been below 50 for 69 consecutive months. Insufficient inventory is a positive sign for future production.

The index for prices for input materials eased back for the third consecutive month in June, falling 3.7 points to 78.5 percent (see third chart). The index is down from 87.1 percent in March 2022 and suggests price pressures, though still intense, have eased slightly.

The supplier deliveries index registered a 57.3 percent result in June, down 8.4 points from the May result. The index was at 78.8 percent in May 2021. The declines over the past year suggest deliveries are slowing at a much slower rate (see third chart).

Overall, manufacturing survey respondents remained optimistic that healthy demand will continue. Noticeable softening among several individual survey indexes suggests supply and demand may be moving closer to balance, helping ease some upward price pressures. Furthermore, on the supply side, fallout from the Russian war against Ukraine continues to disrupt global supply chains. On the demand side, persistently elevated price increases are impacting consumer demand and an intensifying Fed policy tightening cycle is boosting financing costs. The outlook remains highly uncertain.

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