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Despite Weaker than Expected June ISM PMI, Manufacturing Solid, Economy Improving

june ism PMI

It was a mixed bag of data in the June ISM PMI Manufacturing Index from the Institute for Supply Management, with new orders on the increase and production falling back. That was reflected in the 55.3% PMI Index figure for June, which was 0.1 percentage point below the May reading but still more than 10% above the break-even point of 50%.

It was the 13th straight month of growth in the manufacturing, but many increases seem to have leveled off. While new orders grew from 56.9% to 58.9% in the June ISM PMI, the production index fell from 61% to 60% and employment stayed the same at 52.8%.

Analysts warn that unless consumer spending increases to remove some inventory backlogs, manufacturing's year-long growth may slow down. "Manufacturing activity appears to be maintaining positive momentum as producers ramp-up production in response to increased orders for machinery and equipment," said Sterne Agee chief economist, Lindsey Piegza. "But a ramp-up in inventory-building without sustained demand is not a lasting outcome. With consumer spending falling short of expectations thus far in Q2, after a weaker-than-expected start to the year, it remains unlikely that a surge in manufacturing will be a lasting driver in near-term growth."

 June PMI Manufacturing Index from the Institute for Supply Management was at 55.3% for the month of June, which is 0.1% below May. This still marks the 61st consecutive month of overall economic growth. Courtesy: Institute for Supply ManagementManufacturers themselves seem more positive about the near-term growth potential. Among the comments from committee members:

  • "Business volume is increasing at a good pace and consumers appear to be spending more." (Food, Beverage & Tobacco Products)
  • "The strength of the automotive industry continues to drive the high demand for steel." (Fabricated Metal Products)
  • "Business still very solid and strong - Class 8 Truck and RV." (Transportation Equipment)
  • "Seasonal business remains strong." (Primary Metals) "Another strong month overall." (Computer & Electronic Products)
  • "Outlook is better. General uptick in our company's confidence." (Chemical Products)
  • "Orders are picking up, but pricing has declined in last month. Not the norm for this time of year." (Wood Products)
  • "Conditions are slightly more favorable than last year." (Printing and Related Support Activities)
  • "Business is picking up once again." (Machinery)
  • "Business conditions are stable to improving." (Miscellaneous Manufacturing)

June's growth marked the 61st straight month of overall economic growth, according to the June ISM PMI. In fact, the index has not been below 52.0% since a 51.3% reading in January 2014, a decrease largely attributed to the brutal winter in much of the northern U.S. The June reading corresponds to an annual increase in GDP of 4.0%, according to ISM officials.

Still Growth in Manufacturing Numbers from the June ISM PMI, And The Economy Continues to Improve: The Breakdown

INDICATOR: June ISM PMI Index in Manufacturing and May Construction

KEY DATA: ISM (Manufacturing): down 0.1 point; Orders: up 2 points: Employment: flat/ Construction: up 0.1%

IN A NUTSHELL: "Manufacturing activity remains solid and the sharp rise in demand points to improvement going forward."

WHAT IT MEANS: We know the economy went backwards sharply during the winter, but where are we now and where are we going? It looks like the economy is accelerating, but maybe not as rapidly as most of us had hoped. The June ISM PMI measure of activity eased a touch but the May level was the highest in five months. In other words, the winter wipeout has been wiped out. On the positive side, new orders surged and that is good news for future production, which moderated. However, the level of the production index remained quite high, so we are not talking about any major retrenchment. Export demand continued to grow, but less robustly while imports accelerated. Despite the new orders growth, backlogs fell and that may be the reason that hiring didn't pick up. We get the employment report on Thursday and it should be really good, but manufacturing may not be the prime driver of the gains.

In a separate report, construction activity increased less than expected in May as residential activity declined. The good news is that the government is back building infrastructure again as spending on roads, water and sewer projects, power and transportation needs were all up solidly.

June ism PMI Yellen

(Photo: Pete Marovich Bloomberg)

MARKETS AND FED POLICY IMPLICATIONS: Last week we saw that consumer spending was nothing special in May and that has raised some questions about how strong growth was in the just completed second quarter. We know that households bought lots of motor vehicles. Indeed, it looks like the June numbers will be even better than projected. But spending on most other goods was moderate, at best. Disturbingly, demand for services, the largest component of demand, was up minimally. Maybe the warm June caused utility demand to jump, but right now, it is hard to see growth above the four percent growth pace forecasts. But that doesn't mean the economy is weak or soft or not accelerating. The manufacturing sector is not doing well because the rest of the world is growing rapidly. It is doing well because domestic demand is on the rise. So I still think it is possible that the second half of the year will see strong to robust growth, but until that happens, it will remain a hope. And the Fed is not operating on hopes and prayers. Chair Yellen may not be from Missouri but she seems to believe in the state's nickname of "Show Me". Until growth really does hit its stride, the Fed will be keeping rates low (but, you never know with news out JUST this morning about a possibility of increasing rates to pop some potential bubbles). As for investors, it's the first day of the new quarter and they also seem to be willing to believe that rates will remain low and the markets can rise until they are shown that is not the case.

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Adam Robinson
Adam Robinson oversees the overall marketing strategy for Cerasis including website development, social media and content marketing, trade show marketing, email campaigns, and webinar marketing. Mr. Robinson works with the business development department to create messaging that attracts the right decision makers, gaining inbound leads and increasing brand awareness all while shortening sales cycles, the time it takes to gain sales appointments and set proper sales and execution expectations.
Adam Robinson
Adam Robinson
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