June 2010 ISM Reports: Manufacturing and Service Sector Growth Slows

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The Institute for Supply Management’s (ISM) reports on the manufacturing and service sectors provide a more up-to-date view of conditions than either the Federal Reserve Board’s report on industrial production and capacity utilization or the U.S. Census Bureau’s report on manufacturers’ shipments, inventories and orders.

Although economic activity in the manufacturing sector expanded in June for an eleventh consecutive month, ISM’s report on manufacturing hints at an impending slowdown. "The manufacturing sector continued to grow during June,” said Norbert Ore, chair of the ISM Manufacturing Business Survey Committee. “However, the rate of growth as indicated by the Purchasing Managers Index (PMI) slowed when compared to May. The lower reading for the PMI came from a slowing in the New Orders and Production Indexes. We are now 11 months into the manufacturing recovery, and given the robust nature of recent growth, it is not surprising that we would see a slower rate of growth at this time. The sector appears to be solidly entrenched in the recovery. Comments from the respondents remain generally positive, but expectations have been that the second half of the year will not be as strong in terms of the rate of growth, and June appears to validate that forecast."

Forest products manufacturers put in a mixed performance in June. Changes in Wood Products were almost universally negative, a situation confirmed by one respondent who observed that the "market had begun to change [for the better], but it is now declining again." Metrics for Paper Products, on the other hand, were largely positive.

Behavior of the service sector paralleled that of manufacturing; i.e., it grew at a slower pace in June than May. However, overall service employment shrank in June. Real Estate, Rental & Leasing; Agriculture, Forestry, Fishing & Hunting; and Construction were all among the industries reporting growth.

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One of the most remarkable aspects of the manufacturing report was that the input price index fell to 57 percent, 20.5 percentage points (or 26.5 percent) lower than the 77.5 percent reported in May. I.e., prices rose overall in June, but the rate of change slowed dramatically when compared to the prior month (50 percent is the breakpoint between rising and falling prices). Copier paper, corrugated containers and products, and paper products were among the wood-derived products up in price. Diesel and gasoline were down in price.