Another month, another decline for manufacturing output

June manufacturing output saw a very slight decline, while falling for the eighth consecutive month, according to the new edition of the Manufacturing Report on Business, which was issued Monday by the Institute for Supply Management (ISM).

The report’s key metric, the PMI, fell 0.9%, to 46 (a reading of 50 or higher indicates growth). The past eight months of contraction, through June, were preceded by a stretch of 29 consecutive months of growth. ISM said that the overall economy contracted at a faster rate in May, which was eighth straight month of decline, following 30 consecutive months of growth.

The June PMI is 2.8% below the 12-month average of 48.8, with August 2022 marking the high point for that period at 52.9, and June 2023, at 46, marking the lowest.

ISM reported that four manufacturing sectors — printing & related support activities; nonmetallic mineral products; primary metals; and transportation equipment — saw growth in June. And 11 sectors reported contraction, including: plastics & rubber products; wood products; textile mills; chemical products; miscellaneous manufacturing; electrical equipment, appliances & components; computer & electronic products; paper products; fabricated metal products; food, beverage & tobacco products; and machinery.

The report’s key metrics were mixed in May, including:

• New orders, which are commonly referred to as the engine that drives manufacturing, increased 3% to 45.6, contracting at a slower rate for the 10th consecutive month, with five sectors reporting growth;

• Production decreased 4.4% to 51.1, continuing its uneven trajectory, following growth in May (to 51.1, its highest reading since October 2022’s 51.9), which was preceded by five months of contraction, with eight sectors reporting growth;

• Employment decreased 3.3% to 48.1, contracting after two months of growth, with six sectors reporting growth;

• Supplier deliveries, at 45.7 (a reading above 50 indicates contraction), moved faster but at a slower rate, for the ninth consecutive month following May, which saw its fastest supplier delivery performance since March 2009’s 43.2 reading, with six sectors reporting slower deliveries in May;

• Backlog of orders, at 38.7, increased 1.2%, to 38.7, contracting at a slower rate for the ninth consecutive month, following a 5.6% decrease in May. May was the lowest level since February 2009’s 33.6, with no industries reporting a June backlog;

• Inventories, at 44, fell 1.8%, contracting at a faster rate for the fourth consecutive month and dropping to its lowest level since January 2014’s 43.9 reading, with three sectors reporting higher inventories;

• Customer inventories, at 46.2, decreased 5.2% and falling “too low” after coming in “too high” in May, with six sectors reporting growth; and

• Prices, at 41.8, were off 2.4% compared to May, falling for the second consecutive month, with three sectors reporting growth

Comments submitted by the ISM member respondents again highlighted various themes related to the economy and market conditions.

A computer & electronics respondent said that the slowing U.S. economy is causing his company’s business forecast to be revised and reduced for the remainder of 2023, adding that customers are less inclined to purchase far in advance. And a machinery respondent said that orders and business are steady with a healthy backlog, while new prospective orders seem to be getting pushed back into 2024.

Tim Fiore, chair of the ISM’s Manufacturing Business Survey committee, said in an interview that last month ISM’s manufacturing data reflected a lack of new orders and inventory burndown, leading to what he called a “decision point” in June and July, when companies were closing their books for the first half of the year at the end of June.

“When we look back to December, we thought the second half of the year would be better than the first half,” he said. “When we updated the forecast in May, the indications were that it wasn’t going to be much better, if any better, at all … with companies going to have to make an assessment of their headcount and cost structure in June and July and take caution before announcing investments, whether they are a public company or a private company. I think that is what happened in June, with production coming down, which means revenue came down, and employment came down. Which means that is the beginning of a destaffing effort.”

What’s more, he added that ISM’s manufacturing panelists are using layoffs more to manage their headcount down, because it is the fastest way to do so.

Looking at customer demand, in the form of new orders, backlog of orders, customer inventories (down 5.2% in June to 46.2), and new export orders (down 2.7% to 47.3), Fiore said their respective June readings represent significant weakness out of Europe and China, contrasting with more previously positive sentiment.

“In looking at forward demand elements, the only positive one was the customer inventory number, which is probably at the medium side of too low from the low side of too high,” said Fiore. “It is a positive and the lowest number in four months, which is good but it might be transitory. We need to see if it sticks; I like to see that number below 40.”

For inputs, he explained that suppliers are still delivering faster, at 45.7, and are delivering better than they did the previous month, according to Fiore.

Addressing inventories, now at their lowest level in more than nine years, Fiore explained that it is an extremely low number and serves as a good indicator that companies are still adjusting for lower output over the second half of the year. Prices, meanwhile, at 41.8, represent large-scale price productions across most categories, for things like plastic, copper, brass, aluminum, and steel all down, which Fiore expects to continue.

When asked how manufacturing conditions could play out over the second half of the year, for employment he said the sector could increase 1%, down from an initial growth estimate around 3.5%, with capital expenditure pegged at 1.5%, a number Fiore said may be too optimistic.

“I think the second half of the year is going to be pretty soft,” he said. “This is the direct result of a soft landing, which I have said for several months, where you are really not sure where you have landed yet, and I am not sure we have landed yet. With a hard landing, you would know that you landed and would have some decent feel for how long you would stay there. Right now, we still don’t think we have landed and, therefore, have no idea how long we’ll be there and also where the recovery begins. That is kind of where it is at.”

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