US manufacturing extends slump; inflation pressures ebbing

The U.S. manufacturing sector contracted for a third consecutive month in June, as indicated by the Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index (PMI) which dropped to 48.5 from 48.7 in May. This suggests that the sector, which accounts for 10.3% of the economy, has been experiencing subdued demand and the pressures of higher interest rates. The report, released on Monday, showed a widespread weakness across the industry with manufacturers demonstrating an unwillingness to invest due to current monetary policies and other conditions.

Economists expect the manufacturing sector to remain weak for the next couple of quarters due to the retreat in corporate bond yields not being sufficient to get manufacturing growth again. A more significant loosening of financial conditions is required to change this, as stated by Oliver Allen, senior U.S. economist at Pantheon Macroeconomics.

The ISM’s survey also revealed that 62% of manufacturing Gross Domestic Product (GDP) contracted, up from 55% in May. Eight industries, including primary metals and chemical products, reported growth, while nine industries, including transportation equipment, machinery, and electrical equipment, appliances, and components, contracted. Manufacturers’ commentary was mostly downbeat, with some reporting high volume of customer orders, while others complained about cut orders with short notice, causing a ripple effect throughout lower-tier suppliers.

The weakness in manufacturing is reflected in the ongoing contraction reported by government data, with manufacturing contracting at a 4.3% annualized rate in the first quarter. The Federal Reserve has maintained its benchmark overnight interest rate since last July, but financial markets expect the U.S. central bank to start its easing cycle in September. Inflation at the factory gate has been cooling, with the survey’s measure of prices paid by manufacturers dropping to 52.1 in June, the lowest reading since December.

The ISM survey also reported a subdued new orders sub-index of 49.3 and a decrease in output at factories, signaling continued contraction in manufacturing. Factory employment slipped after briefly rebounding in May amid layoffs, attrition, and hiring freezes. The overall labor market is gradually cooling, with nonfarm payrolls expected to increase by 190,000 jobs in June, according to a Reuters survey of economists.

Construction spending also dipped 0.1% in May, as investment in residential construction dropped 0.2%. The perpetuation of high-for-long interest rate policy has boosted the benchmark 30-year fixed mortgage rate back above 7% this spring, which could limit growth in new construction. However, housing supply has improved considerably as demand slackened.

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