By Lucia Mutikani
WASHINGTON- US manufacturing contracted for a third straight month in June as demand remained subdued, while a drop in a measure of prices paid by factories for inputs to a six-month low suggested that inflation could continue to subside.
The weakness at the end of the second quarter reported by the Institute for Supply Management on Monday was across the board, with ISM Manufacturing Business Survey Committee Chair Timothy Fiore describing manufacturers as demonstrating “an unwillingness to invest in capital and inventory due to current monetary policy and other conditions.”
Manufacturing is being pressured by higher interest rates and softening demand for goods, though business investment has largely held up.
“We expect the manufacturing sector to remain weak over the next couple of quarters,” said Oliver Allen, senior US economist at Pantheon Macroeconomics. “The retreat in corporate bond yields since late last year … seems to have provided some support to investment spending, but not enough to get manufacturing growing again. A much more significant loosening in financial conditions is required to change that.”
The ISM’s manufacturing PMI slipped to 48.5 last month from 48.7 in May. A PMI reading above 50 indicates growth in the manufacturing sector, which accounts for 10.3 percent of the economy. The PMI remains above the 42.5 level, which the ISM says over a period of time indicates an expansion of the overall economy.
Economists polled by Reuters had forecast the PMI climbing to 49.1. It has indicated contraction in manufacturing in 19 of the last 20 months. Sixty-two percent of manufacturing gross domestic product contracted, up from 55 percent in May.
The share of sector GDP registering a composite PMI at or below 45 – a good barometer of overall manufacturing weakness – jumped to 14 percent from 4 percent in the prior month.
Eight manufacturing industries, including primary metals and chemical products, reported growth. Machinery, transportation equipment, electrical equipment, appliances and components as well as computer and electronic products were among the nine industries that contracted.
Commentary from manufacturers was mostly downbeat. Makers of chemical products reported a “high volume of customer orders.” Transportation equipment manufacturers, however, complained that “customers continue to cut orders with short notice, causing a ripple effect throughout lower-tier suppliers.”
Makers of electrical equipment, appliances and components reported that “customers (were) ordering more to create buffer stocks, in case of future shortages. Manufacturers of fabricated metal products mentioned signs of weak demand, adding “we must work to reduce inventory levels.”
Machinery manufacturers said “sales backlog is decreasing,” and that they had “furloughed a portion of our workforce as a result.” Makers of miscellaneous manufactured goods reported that the “level of production is lower due to decreased demand for products.”
Stocks on Wall Street were trading higher. The dollar was little changed against a basket of currencies. US Treasury prices fell.
Government data last week showed manufacturing contracted at a 4.3 percent annualized rate in the first quarter, with most of the decline coming from long-lasting manufactured goods.
The Federal Reserve has maintained its benchmark overnight interest rate in the current 5.25 percent -5.50 percent range since last July. Financial markets expect the US central bank to start its easing cycle in September, though policymakers recently adopted a more hawkish outlook. The Fed has hiked its policy rate by 525 basis points since 2022 to quell inflation.
The ISM survey’s forward-looking new orders sub-index rose to a still-subdued 49.3 reading from 45.4 in May. Output at factories decreased for the first time since February.
The production sub-index fell to 48.5 from 50.2 in May.