The Institute for Supply Management (ISM) said that the manufacturing sector contracted in June for the first time since July 2009. The purchasing managers’ index fell from 53.5 in May to 49.7 in June. Readings over 50 suggest an expansion in the sector; therefore, this month’s PMI indicates a slight contraction. A sharp decline in new orders was responsible for the decrease. The index for new orders declined sharply from 60.1 to 47.8. New export orders also dropped below 50.
At the same time, several other components remained positive, albeit with the pace of growth lower. Measures for production and employment, for instance, continued to expand, but with the growth rate slowing from the previous month. Lower prices have also been helpful, with falling energy costs driving down inflationary pressures.
The sample comments help to add some context to the data. Many of them highlight recent weaknesses in the marketplace. One chemical producer said that slowing global growth has impacted their recent orders; the same sentiment was echoed by others. A machinery manufacturer observed, “Business is still strong, with some nagging question whether it will be sustained.” Indeed, anxieties about growth are leading some manufacturers to show some restraint. “We are watching our expenses very tightly and being cautious,” reported an apparel manufacturer. One positive side effect has been lower pricing pressures.
With that said, some respondents continued to report signs of growth, with someone in the primary metal industry noting strong business. Likewise, a peer in the petroleum sector suggesting continued struggles in recruiting skilled labor.
Overall, these numbers suggest that growth in the manufacturing sector has slowed significantly. The decline in new orders, including exports, does not bode well for activity in the next month or so. This shows that manufacturers are not immune to the struggles in Europe and elsewhere which have eased global growth. Businesses are also uncertain about domestic tax and regulatory policies in 2013 and beyond, with increasing conversations about the “fiscal cliff.”
Despite such headwinds, manufacturers have been cautiously optimistic about production and employment in the second half of this year. Manufacturing has been a bright spot in the recovery to date, and it will be important for the sector to return to growth as soon as possible. This will require stronger overseas growth, but it will also hinge on pro-growth policies stemming from Washington.
Chad Moutray is chief economist, National Association of Manufacturers.