US factory activity cooled more than expected last month, hotly anticipated data out Friday showed.
It was the latest evidence to support a recession narrative that continues to gather adherents amid slowing consumption and abysmal consumer sentiment tied to a worsening cost of living crisis.
ISM manufacturing fell to 53 in June, well below the 54.5 economists expected and near the low-end of the range. It was the most tepid ISM print in two years (figure below).
Separately, the final read on S&P Global’s US manufacturing gauge for June ticked higher from the flash print, but at 52.7, the headline was less than rollicking.
Notably, ISM new orders slipped into contraction territory at 49.2, the lowest reading since May of 2020. The employment gauge dropped further below 50, to 47.3. Prices paid receded.
There’s a sense in which this is good news, although it certainly won’t be greeted as such by markets obsessed with recession. This is precisely the type of slowdown that can help balance supply and demand, something ISM hinted at.
“Despite the Employment Index contracting in May and June, companies improved their progress on addressing moderate-term labor shortages at all tiers of the supply chain,” ISM’s Timothy Fiore said Friday, adding that “panelists reported lower rates of quits compared to May [and] prices expansion slightly eased for a third straight month” even as “instability in global energy markets continues.”
Respondents were still generally optimistic, even as consumers most assuredly aren’t (figure below).
Eventually, you’d expect the rather glaring disparity between sentiment and anecdotal activity indicators to close. Considering the precipitous drop in consumer expectations as evidenced by, for example, the Conference Board’s forward-looking gauge, it’s likely that measures of activity (hard, soft and otherwise), will catch down to the public’s exceedingly dour assessment of the economy’s prospects.
The ISM anecdotes were far less colorful in the June vintage than they’ve been over the past year, suggesting that, for better or worse, things are calming down. Words like “steady,” “stabilized” and “settling” indicate the frenzy has abated.
Stocks have largely converged to ISM’s reality. Apparently, supply executives missed their calling as top-down equity strategists (figure below).
At the risk of perpetuating the pervasive sense of gloom across markets, I’d venture the next stop for both is lower.
The color accompanying S&P Global’s final report for June had a glass-half-empty feel. “The PMI survey has fallen to a level indicative of the manufacturing sector acting as a drag on GDP, with that drag set to intensify as we move through the summer,” Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said Friday. “Forward-looking indicators such as business expectations, new order inflows, backlogs of work and purchasing of inputs have all deteriorated markedly to suggest an increased risk of an industrial downturn.”
Cue more “nowcasting.”
