Even though U.S. manufacturing fell even more in June, to levels last seen when the country was still recovering from the COVID-19 pandemic, pricing pressures at the factory gate kept falling, which was good news for the economy.

According to a poll released on Monday by the Institute for Supply Management (ISM), companies had to resort to layoffs due to declining activity. Chair of the ISM Manufacturing Business Survey Committee Timothy Fiore stated that the practise is occurring “to a greater extent than in prior months.”

The ISM survey appears to support a recessionary state of the economy. However, the so-called hard indicators, including nonfarm payrolls, initial claims for unemployment insurance, and housing starts, indicate the economy is still chugging ahead.

However, the risks of a downturn have grown as firms and consumers adjust to the Federal Reserve’s interest rate rises of 500 basis points since March 2022, when it began its quickest monetary policy tightening drive in more than 40 years.

“This provides further reason to suspect that a recession is on the horizon,” said Andrew Hunter, deputy chief U.S. economist at Capital Economics. “The ISM survey adds to the evidence that core goods prices will start falling again soon.”

The manufacturing PMI for the ISM fell from 46.9 in May to 46.0 last month, which is the lowest number since May 2020. The PMI remained below the 50-point barrier for the eighth consecutive month, which implies manufacturing contraction. This is the longest such run since the Great Recession.

According to Reuters’ poll of economists, the index was expected to nudge up to 47. According to government figures released this week, the manufacturing sector, which makes up 11.1% of the economy, shrank at an annualised pace of 5.3% in the first quarter.

Despite the strong demand for products like transportation equipment, there are still some areas of strength.

According to the ISM poll, out of the six largest industries, only the transportation equipment sector had growth in December.

Nevertheless, producers of transportation equipment voiced concern that second-quarter sales would fall and inventory levels might rise. They expected total year-end revenues “to be about where we were last year.”

In addition to the expensive borrowing charges, spending is shifting away from goods, which are traditionally purchased on credit, and towards services, which is harming manufacturing. Additionally, businesses are carefully controlling their inventory in preparation for a sluggish demand.

According to economists, the sector has yet to see the negative effects of a credit crunch following the volatility in the financial markets earlier this year.

In June, basic metals, printing, nonmetallic mineral goods, and transportation equipment all experienced growth. Wood goods, textile mills, electrical equipment, appliances and components, machinery, and computer and electronic items were among the 11 industry groups that received contracts.

A shorter session on Wall Street finished with stocks there marginally higher in anticipation of the July 4 vacation on Tuesday. Prices for US Treasury notes varied. In relation to a currency basket, the dollar remained stable.

The forward-looking new orders sub-index of the ISM survey grew from 42.6 in May to a still low 45.6 amid heightened caution from both firms and consumers.

“Inventory investment has become a drag on activity as factories become increasingly wary of excess stockbuilding,” 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.”

Manufacturers of computers and electronics claimed that “customers are less inclined to purchase far in advance.” Food, beverage, and tobacco product manufacturers stated that “there is an elevated level of capital project review.”

“Orders and business are steady with a healthy backlog,” machinery makers observed, “but new prospective orders seem to be getting pushed back into 2024.”

Low demand is bringing down input costs. As supply chain bottlenecks have significantly decreased and demand has been tempered by increased borrowing costs, the survey’s assessment of prices paid by manufacturers dropped to 41.8 from 44.2 in May.

For nine months in a row, suppliers to industrial organisations have performed better in terms of delivery performance, which has caused a decline in the price of items.

However, services inflation, which is currently the main concern, continues to be persistent due to higher pay growth brought on by a tight labour market as well as rising housing rentals.

The survey’s measure of factory employment dropped from 51.4 in May to 48.1 this month. Although the government’s nonfarm payroll count is an inaccurate indicator of manufacturing employment, it is consistent with predictions that hiring will slow down by year’s end.

According to a Reuters survey of experts, the government is anticipated to announce on Friday that payrolls climbed by 225,000 jobs in June after increasing by 339,000 in May.

Due to a lack of available homes for sale, housing appears to be recovering while manufacturing is declining.

According to a separate data released on Monday by the Commerce Department, investment in single-family housing projects increased 1.7%, and spending on residential construction rose 2.2% in May after falling 0.9% the previous month.

Because of this, overall construction spending increased by 0.9% in May after increasing by 0.4% in April.

“The residential segment has benefited from renewed demand while the inventory of existing homes for sale has remained low because homeowners have little incentive to sell in a weaker real estate market while assuming larger mortgage payments,” said José Torres, senior economist at Interactive Brokers in Miami.

(Adapted from BusinessToday.in)

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