Bad shape: A worker welds a commercial class road paver at a factory in Taylors, South Carolina. US manufacturing dropped further in June, reaching levels last seen when the world’s largest economy was stricken by the Covid-19 pandemic. — Reuters
WASHINGTON: US manufacturing slumped further in June, reaching levels last seen when the nation was reeling from the initial wave of the Covid-19 pandemic, but price pressures at the factory gate continued to deflate, something of a silver lining for the economy.
Shrinking activity left factories resorting to layoffs, a survey from the Institute for Supply Management (ISM) showed on Monday.
ISM Manufacturing Business Survey Committee chair Timothy Fiore described the practice as happening “to a greater extent than in prior months”.
At face value, the ISM survey is consistent with an economy that is in recession. But the so-called hard data, such as non-farm payrolls, first-time applications for unemployment benefits, and housing starts, suggest the economy continues to grind along.
The risks of a downturn have, however, increased as businesses and consumers deal with the 500 basis points worth of interest rate increases from the Federal Reserve since March 2022, when the US central bank embarked on its fastest monetary policy tightening campaign in more than 40 years.
“This provides further reason to suspect that a recession is on the horizon,” said Andrew Hunter, deputy chief US economist at Capital Economics.
“The ISM survey adds to the evidence that core goods prices will start falling again soon.”
The ISM’s manufacturing purchasing managers’ index (PMI) dropped to 46 last month, the lowest reading since May 2020, from 46.9 in May.
That was the eighth straight month that the PMI stayed below 50, which indicates a contraction in manufacturing, the longest such stretch since the Great Recession. Economists polled by Reuters had forecast the index edging up to 47.
Manufacturing, which accounts for 11.1% of the economy, contracted at a 5.3% annualised rate in the first quarter, government data showed last week.
Some pockets of strength remain, however, amid solid demand for goods like transportation equipment.
The ISM survey showed that transportation equipment was the only one of the six biggest industries reporting growth last month.
But even so, makers of transportation equipment expressed worries that second-quarter sales could decrease and boost inventory levels.
They projected total end-of-the-year sales “to be about where we were last year”.
Apart from the exorbitant borrowing costs, manufacturing is also being undermined by spending shifting to services from goods, which are typically bought on credit.
Businesses are also carefully managing inventories in anticipation of weak demand.
Economists said that the sector has yet to feel the pain of a tightening in credit following financial market turmoil earlier this year.
In addition to transportation equipment, printing, non-metallic mineral products, and primary metals grew in June.
The 11 industry groups contracting included wood products, textile mills, electrical equipment, appliances and components, machinery, and computer and electronic products.
Stocks on Wall Street ended slightly higher in a shortened session ahead of yesterday’s July 4 holiday. US treasury prices were mixed. The US dollar was steady against a basket of currencies.The ISM survey’s forward-looking new orders sub-index climbed to a still-subdued 45.6 from 42.6 in May amid increased caution from businesses and consumers.
“Inventory investment has become a drag on activity as factories become increasingly wary of excess stock-building,” said Jonathan Millar, a senior economist at Barclays in New York.
“We continue to see ripening conditions for a downturn in hard data on factory production in the next few quarters.” — Reuters
