The ISM Manufacturing Index declined by 0.5 points in June to 51.2, falling short of expectations for a reading of 52.0. That represented the weakest result since August 2016.
Of particular note were sharp declines in production (54.1 to 50.8) and employment (54.5 to 51.7). Both remain in positive territory, but the pace of growth slowed meaningfully in conjunction with slowing demand.
Still, the underlying data wasn’t universally negative. The critical New Orders component rose moderately after holding steady in June, providing a silver lining to the report. Given the importance of new orders for the future outlook, the fact that order volume appears to be stabilizing rather than continuing to deteriorate is a positive sign.
While the U.S. and China may be making some headway toward resolving the trade dispute, progress continues to be very slow and at this point it remains unclear whether or not a deal will be reached. Given the number of times that optimism about seeming progress has been followed by setbacks, skepticism has understandably risen.
Better-than-expected GDP and labor market data over the past few months has helped to buoy consumer confidence, which improved markedly in July. Consumer spending growth also surged in the second quarter, helping to offset weak results in business investment. The combination could result in a divergence in results across the manufacturing sector, with a more favorable outlook for consumer-oriented businesses than for those manufacturers more reliant on industry.
The Fed’s recently announced rate cut may provide some modest support at the margins, but isn’t likely to materially impact business spending. That will likely require a brightening of the global economic outlook and clarity around trade policy. Without those, a meaningful recovery in business investment appears unlikely.
The bottom line is that the continued slowdown in the cyclically sensitive manufacturing sector reflects not only the deceleration in the broad economy, but the significant policy uncertainty around trade and tariffs that has a disproportionately negative effect on the sector. Signs of stabilization in new orders is a positive, but the outlook for the sector remains challenged.
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