The ISM Manufacturing Index declined to 51.7 in June. While softer than the May reading of 52.1, it was modestly better than economists had expected and signaled that the manufacturing sector continued to expand for the 34th consecutive month.
Among the more noteworthy components of the index, results were mixed.
The closely-watched New Orders index declined further to 50.0, indicating effectively no change in orders from the prior month. The good news is that orders didn’t decline outright, but the reading still sends a cautionary message that order growth has stalled. As a key forward-looking indicator, the near-term direction of new order activity will merit close monitoring in the coming months.
Conversely, employment grew at a faster pace in June. Against the backdrop of a slower economy and heightened uncertainty on the trade front, the fact that manufacturers are not only hiring but doing so at a faster pace suggests a degree of confidence in the business outlook. Production also picked up, with the index bouncing from 51.3 in May to 54.1.
Still, policy uncertainty is weighing heavily on the manufacturing sector. The lingering standoff with China over trade remains a significant cloud hanging over the manufacturing economy. Threats of tariffs against Mexico create further challenges to supply chain and cost management. Given the high degree of uncertainty in trade policy, it can’t be a surprise that manufacturers that rely on global supply chains are forced to adopt a more conservative stance.
In the short term, the deal reached between Mexico and the U.S. provided at least a temporary reprieve on the implementation of tariffs, but it’s now clear that it’s no longer just about addressing perceived trade inequity; tariffs are squarely on the table to be used as leverage for non-trade related policy matters. That alone changes the calculus for businesses that rely on trade with Mexico, adding to the risk of doing so.
The bottom line is that the manufacturing sector continues to feel the impact of trade policy uncertainty and the slowing global economy. Despite those challenges, the sector continues to grow, albeit at a slower pace. If the economy can live up to expectations for moderate growth to continue, manufacturing activity should solidify as well. Progress on a longer-lasting deal with China and an easing of immigration tensions with Mexico would certainly help. How likely is a lasting deal with either? That’s the question, and one for which even the probability can swing quickly and dramatically in the current environment.
Our experts were recently quoted on this topic in the following publication:
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.