US manufacturing recession deepens, factory pricing pressure subdued

Sub Levels

Lucia Mutikani

WASHINGTON (Reuters) – U.S. manufacturing fell further in June, hitting levels last seen as the country reeled from the early waves of the coronavirus pandemic. However, factory entry price pressures continued to ease, a positive sign for the economy.

Cutbacks in production have forced factories to resort to layoffs, according to a survey Monday by the Institute for Supply Management (ISM). Timothy Fiore, chairman of the ISM Manufacturing Research Commission, said the practice was occurring “to a greater extent than in previous months.”

At face value, the ISM survey is consistent with a recession. But so-called hard data, such as nonfarm payrolls, first-time unemployment claims and housing starts, suggest the economy is still doing well.

But since March 2022, when the U.S. central bank embarked on its fastest monetary tightening campaign in more than 40 years, the risk of an economic downturn comes as businesses and consumers grapple with a 500-basis-point rate hike by the Federal Reserve. is rising. .

“This gives us further reason to suspect a recession is imminent,” said Andrew Hunter, deputy chief US economist at Capital Economics. “The ISM survey adds to the evidence that core goods prices will soon begin to fall again.”

The ISM manufacturing PMI fell to 46.0 last month from 46.9 in May, the lowest since May 2020. The PMI fell below 50, the benchmark for contracting manufacturing, for the eighth straight month, the longest since the Great Recession.

Economists polled by Reuters had expected the index to rise to 47. Manufacturing, which accounts for 11.1% of the economy, contracted at an annualized rate of 5.3% in the first quarter, government data showed last week.

However, some strength still remains due to strong demand for transportation equipment.

Transport equipment was the only one of the six largest industries to report growth last month, according to the ISM survey. Still, transportation-equipment makers expressed concern that sales could fall in the second quarter and inventory levels could rise. They predicted that year-end total sales “will be about the same as last year.”

Apart from exorbitant borrowing costs, manufacturing is also undermined by a shift in spending from goods normally purchased on credit to services. Companies are also carefully managing inventories in anticipation of slowing demand.

Economists say the sector has yet to feel the pain of a credit tightening after the financial market turmoil earlier this year.

In June, in addition to transportation equipment, printing, non-metallic mineral products, and primary metals also grew. The 11 trade associations that signed the agreement included wood products, textile mills, electrical equipment, home appliances and parts, machinery, computers and electronic products.

Wall Street stocks closed slightly higher in shortened trading ahead of the holiday on Tuesday, July 4. U.S. Treasury prices were mixed. The dollar was firm against a basket of currencies.

weak demand

The ISM survey’s forward-looking new orders sub-index rose to a still-subdued 45.6 from 42.6 in May amid heightened caution from both businesses and consumers.

“Inventory spending is a drag on activity as factories become more wary of overstocking,” said Jonathan Miller, senior economist at Barclays in New York. “We continue to see the conditions set for the downside of hard data on factory production in the next few quarters.”

“Customers have long been less inclined to buy,” said one computer and electronics maker. Manufacturers of food, beverages and tobacco products noted “increasing levels of review of capital projects”.

The machine maker reported that “orders and business are strong and the order backlog is healthy, but new order prospects appear to be pushed back to 2024.”

Weak demand has led to lower raw material prices. The survey’s indicator of prices paid by manufacturers fell to 41.8 from 44.2 in May, as supply chain bottlenecks eased significantly and rising borrowing costs constrained demand.

Deliveries to supplier manufacturing organizations accelerated for the ninth straight month, leading to commodity inflation. However, service inflation, which is currently the main focus, remains sluggish due to rising wage growth due to a tight labor market and higher housing rents.

The survey’s index of factory employment fell to 48.1 from 51.4 in May. Government nonfarm payrolls are a less reliable predictor of manufacturing employment, but are consistent with expectations of a slowdown in hiring by the end of the year.

Economists polled by Reuters said the government is expected to announce on Friday that employment rose by 225,000 in June, following a 339,000 increase in May.

Manufacturing is deteriorating, but housing appears to be making a comeback as there is a shortage of homes for sale.

A separate report released on Monday by the Department of Commerce said spending on housing construction rebounded 2.2% in May from a 0.9% drop in the previous month, while investment in single-family housing projects accelerated 1.7%.

As a result, overall construction spending increased by 0.9% in May after increasing by 0.4% in April.

“The housing sector is benefiting from new demand, but inventory of existing homes for sale remains low,” said Jose Torres, senior economist at Interactive Brokers. “Assuming it will increase, there is little incentive to sell in a depressed real estate market.” Miami.

(Edited by Lucia Mutikani, Chizu Nomiyama and Andrea Ricci)

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