Manufacturing activity slumped in June to a two-year low as new orders and employment contracted, the latest sign that the economy is weakening under the burden of high inflation, and tightening monetary policy.
The Institute for Supply Management’s index of manufacturing activity fell to 53 last month from 56.1 in May, according to data released Friday. The reading was weaker than the Econoday median forecast of 55.
Readings above 50 indicate ongoing expansion and readings lower indicate contraction. The June number indicates expansion has slowed and may be nearing a reversal.
While the manufacturing sector is only a small part of the overall U.S. economy it is seen as a bellwether. Declines in manufacturing often precipitate broader declines.
Customers have cut back orders because of high prices and concerns that U.S. consumer spending is weakening. The gauge of new orders fell 5.9 percent and now indicates that orders are contracting for the first time since May of 2020.
Consumer spending rose just 0.2 percent in May, the Commerce Department said Thursday. Adjusted for inflation, consumer spending fell 0.4 percent. Spending on long-lasting goods fell by an unadjusted 3.2 percent from the prior month and 3.5 percent after inflation. Nondurable goods spending fell 0.6 percent after adjusting for inflation.
Household spending was also weaker in the first three months of the year than previously thought. On Wednesday, the Commerce Department said that consumer spending rose at a 1.8 percent annual rate, down sharply from the 3.1 percent expansion reported in the prior report on the first quarter.
The barometer of employment also declined into negative territory, suggesting that payrolls may have begun to contract.
The growth of new export orders slowed. Imports grew, reversing the contraction in the prior month. The combined results are likely to weigh on second quarter GDP. The 1.6 percent economic contraction recorded in the first quarter of the year was in large part caused by a surging trade deficit.
Supplier deliveries improved, suggesting that there was some relief on the supply-chain front. Prices increases slowed but remain at a historically fast pace, indicating inflation is still running very high.
“The U.S. manufacturing sector continues to be powered — though less so in June — by demand while held back by supply chain constraints,” said ISM’s Timothy Fiore.
The barometer of customer inventories rose but the ISM considers it still at a level considered “too low.” One of the comments from an apparel industry manufacturer indicated the opposite.
“We are hearing from customers that their inventories are high, and sales are coming down. We expect orders to decline in the coming months until inventories are leveled properly against demand,” one executive told ISM.
Several large retailers have said they will need to reduce current inventories in light of changing consumption patterns and declining demand.
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