June 2023 ISM and S&P Global Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey of U.S. manufacturers reflected faster contraction in the sector during June. The PMI registered 46.0%, down 0.9 percentage point (PP) from May’s reading. (50% is the breakpoint between contraction and expansion.) ISM’s manufacturing survey represents under 10% of U.S. employment and about 20% of the overall economy. Subindexes with the largest changes included customer inventories (-5.2PP), production (-4.4PP), employment (-3.3PP), and new orders (+3.0PP). 

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Concurrent activity in the services sector -- which accounts for 80% of the economy and 90% of employment -- expanded more rapidly (+3.6PP, to 53.9%). Overall business activity (+7.7PP), inventory sentiment (-7.0PP), imports (+4.6PP), and employment (+3.9PP) exhibited the largest changes.

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Of the industries we track, Real Estate and Construction expanded. Respondent comments included the following --

Real Estate. “Business remains higher than a year ago but is falling short of forecasts and projections.”

Paper Products. “Input costs for materials continue to decline. Demand is trending to about 2019 levels, accounting for inflation. The COVID-driven demand has moderated.”

 

Changes in S&P Global‘s survey headline results were consistent with ISM’s. Details from S&P Global’s surveys follow --

Manufacturing. Renewed drop in output as demand dwindles, with price pressures dissipating in June.

Key findings:
* Sharper fall in new orders sparks decline in production
* Faster decrease in input costs, with selling prices little-changed
* Destocking at manufacturers intensifies

 

Services. Robust services growth accompanied by reignition of cost pressures in June.

Key findings:
* Steep rise in new orders drives activity growth
* Input cost inflation sharpest since January...
* ...but output charges increase at slowest rate for four months

 

Commentary by Chris Williamson, S&P Global’s chief business economist --

Manufacturing. “The health of the U.S. manufacturing sector took a sharp turn for the worse in June, adding to concerns over the economy potentially slipping into recession in the second half of the year.

“Leading the darkening picture was a severe drop in demand for goods, with new orders slumping at a rate among the steepest since the global financial crisis of 2009. Companies report that customers have become increasingly reticent to spend amid the rising cost of living, higher interest rates, growing concerns about the economic outlook and a switch in spending to services.

“Exacerbating the downturn has been a continued focus on inventory reduction as manufacturers, their suppliers and their customers all seek to cut warehouse stocks in the face of weakening demand.

“In this environment, pricing power is fading rapidly. Prices charged for inputs by suppliers are now falling at a rate not seen since 2009 barring only the early pandemic lockdown months. Prices charged for goods leaving the factory gate meanwhile barely rose in June amid increasing reports of discounting, indicating a near-total collapse of inflationary pressures in the goods-producing sector.

“The focus now turns to the service sector, where inflationary pressures have been more stubborn in recent months amid resurgent post-pandemic demand. The big question is how long this service sector spending can be sustained in the face of headwinds from the cost of living and higher interest rates.”

 

Services. “June saw encouraging resilience of the U.S. services economy, which helped offset a renewed contraction of manufacturing output to ensure the overall pace of economic growth remained encouragingly solid. The surveys signal GDP growth of just under 2% for the second quarter as a whole, albeit with June seeing some loss of momentum.

“Demand for services has remained surprisingly buoyant in the face of headwinds from the increased cost of living and higher interest rates, with spending still being supported by a post-pandemic tailwind for spending by consumers in particular. Higher interest rates and recent market gains are also boosting demand for some financial services.

“The worry is that, although selling price inflation has cooled further, June saw increased cost growth in the service sector, which has been the main area of inflation concern in recent months. Higher wages in particular are driving costs up and could keep selling price inflation stubbornly elevated in the months ahead.”

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.