US Manufacturing Activity Shrinks by Most in Three Years

US factory activity contracted for an eighth month in June, slipping to the weakest level in more than three years as production, employment and input prices retreated.

(Bloomberg) — US factory activity contracted for an eighth month in June, slipping to the weakest level in more than three years as production, employment and input prices retreated.

The Institute for Supply Management’s manufacturing gauge fell to 46, the weakest since May 2020, from 46.9 a month earlier, according to data released Monday. The current stretch of readings below 50, which indicates shrinking activity, is the longest since 2008-2009. 

The reading was also worse than all but one estimate in a Bloomberg survey of economists.

The decline in the ISM production gauge, which also fell to the lowest level since May 2020, suggests demand for merchandise remains weak. The index of new orders contracted for a 10th straight month and order backlogs shrank, which may help explain a pullback in a measure of manufacturing employment.

The ISM gauge retreated to a three-month low and, at 48.1, indicates fewer producers adding to payrolls.

Many Americans continue to limit their spending on merchandise as they rotate to services and experiences. Others are simply tightening their belts as still-high inflation takes a toll on their incomes.

Eleven industries reported shrinking activity in June, led by plastics and rubber products, wood products and textile mills.

Select ISM Industry Comments

“Customer orders have definitely slowed down. Our company thought the second half of 2023 would be better than the first half, but this doesn’t seem to be the case.” — Chemical Products

“Maintaining a strong order backlog. Continue to struggle with hiring hourly factory workers and finding qualified management candidates — higher turnover than desired. Pricing has stabilized, but labor costs remain high.” — Primary Metals

“The slowing US economy is causing the business forecast to be revised/reduced for the remainder of 2023. Customers are less inclined to purchase far in advance.” — Computer and Electronic Products

“Orders and business are steady with a healthy backlog, but new prospective orders seem to be getting pushed back into 2024.” — Machinery

At the same time, recent government data has shown business demand for equipment is still healthy and, if sustained, could provide some support for manufacturers.

“Demand remains weak, production is slowing due to lack of work, and suppliers have capacity,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement. “Panelists’ companies reduced production and began using layoffs to manage head counts, to a greater extent than in prior months, amid mixed sentiment about when significant growth will return.”

Shrinking Inventory

The ISM gauge of customer stockpiles shrank at the fastest pace since October, while the index of factory inventories dropped to the lowest level since 2014.

Producers are also finding relief in declining commodities prices. The group’s index of prices paid for materials slid to 41.8, the lowest this year.

The report corroborates other data showing a struggling manufacturing sector. Regional surveys from the Federal Reserve banks of Dallas, Richmond and Philadelphia all painted a pessimistic picture.

(Adds chart, industry comments.)

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