WASHINGTON, July 1 (Reuters) – US manufacturing activity slowed more than expected in June, with new orders falling for the first time in two years, indicating a cooling economy amid aggressive monetary tightening by the Federal Reserve.
A survey by the Institute of Supply Management (ISM) on Friday also showed factory employment falling for the second month in a row, although a “vast majority” of companies said they were hiring new workers.
The slowdown in output followed a modest rise in consumer spending in May and a decline in new homes, building permits and factory output, leading some economists to expect gross domestic product (GDP) to fall sharply in the previous three months. second quarter. this year. Another drop in GDP does not necessarily mean a recession unless the economy is suffering from severe unemployment.
“That’s not to say a recession is imminent, but growth conditions continue to broadly slow as the Fed tightens and price pressure on consumers and businesses intensifies,” said Ben Ayers, senior economist at Nationwide in Columbus, Ohio.
The ISM National Manufacturing Activity Index fell to 53.0 last month, the lowest reading since June 2020, when the industry was recovering from the downturn caused by COVID-19. It was followed by a value of 56.1 in May. The index should fall to 43.1 to signal a recession.
A reading above 50 indicates growth in the manufacturing sector, which accounts for 11.8% of the US economy. Economists polled by Reuters had expected the index to fall to 54.9.
US production has a better base than plants in the Eurozone and Asia. The slowdown in some activity reflects a shift in spending from goods to services.
The six major manufacturing industries—computer and electronic products, machinery, transportation equipment, oil and coal, food and chemicals—all showed moderate to strong growth.
“We are at risk of sliding into a recession,” said Ryan Sweet, senior economist at Moody’s Analytics in West Chester, Pennsylvania.
A separate report from the Commerce Department on Friday showed that construction spending unexpectedly fell in May, fueling recession fears. While the Federal Reserve Bank of Atlanta cut its second-quarter GDP forecast to contraction, Goldman Sachs expects the economy to grow at an annual rate of 1.9%. GDP fell by 1.6% in the first quarter.read more
Last month, the Fed raised the discount rate by three-quarters of a percentage point, the biggest increase since 1994, to quell high inflation. Another similar rate increase is expected in July. The US central bank has raised its overnight base rate by 150 basis points since March.
Shares on Wall Street declined on Friday. The dollar rose against a basket of currencies, while the prices of US Treasury bonds rose.
The ISM study’s prospective new orders sub-index fell to 49.2 from 55.1 in May. Some economists said it fell below 50 for the first time since May 2020, a reflection of companies adjusting orders to current demand conditions after overordering due to tight supply chains.
“The rollover of capex commitments shows that business conditions remain strong,” said Conrad DeQuadros, senior economic adviser at Brean Capital in New York.
Slow order growth has been a recurring theme for most businesses and few, including transport equipment manufacturers and manufacturers of electrical equipment, appliances and components, said demand remains strong, the ISM survey showed. But the portfolio of orders continues to grow steadily, which should keep the plants running.
The ISM survey still believes customer inventory is “too low”. Business inventories were sharply revised upward in the first quarter, with major retailers such as Walmart (WMT.N) and Target (TGT.N) reporting excess inventory.
Manufacturers of apparel, leather and related products said they “expect lower orders in the coming months until stocks match demand.”
There is encouraging news from the investigation. The suppliers’ supply index fell to 57.3 from 65.7 in May. A value above 50 indicates slower deliveries to the plant.
The producer price index fell to 78.5 from 82.2 in May, confirming the view that lower demand for goods could help lower inflation, although this could be offset by higher prices for services.
But the manufacturing employment survey fell even further to 47.3 from 49.6 in May, likely due to a combination of weaker demand and a shortage of workers. Tech companies like Tesla (TSLA.O) are laying off employees.
With 11.4 million unfilled jobs in the economy at the end of April, economists caution against interpreting continued weakness in factory employment as a sign of a slowdown in overall job growth. Initial jobless claims remained low and payrolls rose in May.read more
“The June data should be treated with caution,” said Will Compernoll, senior economist at FHN Financial in New York.
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Post time: Oct-31-2022