US Manufacturing Slump Deepens as Inflation Eases

Last updated: July 2, 2024

People standing near a green metal industrial machine
U.S. manufacturing experienced its third consecutive monthly contraction in June, driven by weak demand and easing inflation pressures. The Institute for Supply Management (ISM) reported widespread weakness, with manufacturers hesitant to invest amid current monetary policies.

Higher interest rates and declining demand have squeezed the sector, although business investment remains steady. Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, emphasized the need for significantly looser financial conditions to revive manufacturing growth.

In June, the ISM’s manufacturing PMI dipped to 48.5 from 48.7 in May, signaling ongoing contraction. Sixty-two percent of manufacturing GDP contracted, up from 55% in May. Despite this, eight industries, including primary metals and chemical products, reported growth, while nine, such as machinery and transportation equipment, contracted.

Stock markets showed resilience, the dollar remained stable, and U.S. Treasury prices fell. The Federal Reserve has maintained its interest rate between 5.25% and 5.50% since July 2022, with potential easing expected in September, though recent hawkish statements suggest caution.

The forward-looking new orders sub-index improved to 49.3, though still subdued. Factory output declined, with the production sub-index falling to 48.5 from 50.2 in May. The measure of prices paid by manufacturers dropped to 52.1, the lowest since December, indicating the potential for continued disinflation.

Improving supply chains also bodes well for rebalancing goods demand and supply, noted Conrad DeQuadros, senior economic advisor at Brean Capital. Factory employment declined amid layoffs and hiring freezes, reflecting a gradually cooling labor market.

Higher borrowing costs have tempered growth in the construction sector. The Commerce Department reported a 0.1% dip in construction spending in May, following a 0.3% increase in April. Residential construction investment dropped by 0.2%, with housing demand softening due to higher mortgage rates and improved housing supply.

Michael Hanson, an economist at JPMorgan, projected a likely pullback in residential construction in the latter half of the year, citing the impact of sustained high interest rates.

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