Manufacturing activity in June continued to show signs of weakness, remaining in contraction territory. However, there was a slight decrease in inflation pressure as the prices paid component fell by 4.9 points. Despite this, new orders saw an increase, although they remained in contraction.
The ISM manufacturing index dropped to 48.5 in June, indicating that tight credit conditions and high borrowing costs are still constraining activity in the factory sector. The prices paid component also decreased to 52.1, the largest drop among all components, suggesting a moderation in price pressures.
While the bounce in the orders component to 49.3 is a positive sign after a decline in May, there are emerging challenges in shipping and supply chains. The ongoing issues in the Suez Canal are causing disruptions, although they have not yet led to major disruptions. The supplier deliveries measure increased slightly to 49.8 from May.
One interesting observation is the divergence between the manufacturing and service sectors since the Federal Reserve began raising rates in 2021. The service sector has been performing better than the manufacturing sector, which has been struggling to recover. This disparity can be attributed to various factors, including the impact of COVID-19 on supply chains and consumer behavior.
The Federal Reserve’s decision to raise rates has had a more significant impact on the manufacturing sector, which has seen a decline in activity. In contrast, the service sector has remained relatively stable, with only two months of contraction in the past 20 months.
Looking ahead, the June jobs report is expected to show a net gain of 200,000 jobs. The employment component in the recent report came in at 49.3, which is unlikely to have a significant impact on job growth. Manufacturing jobs have been relatively stagnant, adding or subtracting no more than 8,000 jobs in any given month this year.
In terms of GDP growth, equipment outlays increased by 1.6% in the first quarter of the year, following a decline in the previous year. Business fixed investment was stronger overall, boosting the headline GDP growth. Intellectual property outlays also saw a significant increase, indicating potential growth in capital outlays in the future.
Overall, the manufacturing sector is facing challenges due to supply chain disruptions and inflation pressures, while the service sector is showing more resilience. The impact of the Federal Reserve’s rate hikes and consumer behavior during the pandemic are key factors influencing the performance of these sectors. The outlook for the economy remains uncertain, with potential for growth in certain areas and challenges in others.