Manufacturing in a World of Stress

The Institute for Supply Management (ISM) reported that their widely-followed Purchasing Managers’ Index (PMI), a short-term leading indicator of U.S. manufacturing growth, increased by 0.7 percentage points from May to a level of 53.5 percent in June. Generally speaking, such a reading is indicative of continued manufacturing output gains at a slightly accelerated pace. But amidst a myriad of global challenges and conflictingdata, the positive PMI reading needs to be placed in context.  The new orders and production indices were generally flat, with the former increasing by 0.2 percentage points and the latter declining by 0.5 percentage points. By contrast, the component which tracks the backlog of orders fell by a disconcerting 6.5 percentage points from May to June.  With a reading of 47 percent for June, the backlog index is now well into contraction territory, foreshadowing manufacturing weakness over the next few months.

The slide in the backlog of orders corroborates recent output data which show a contraction in factory sector output during the first quarter of 2015 and, given weakness in April and May, the distinct possibility of another contraction in the second quarter. The respondent comments to the June PMI survey, while mixed, are indicative of a world of challenge. One respondent revealed that business is holding in the U.S. but is soft in Europe and declining in Asia.  A respondent from the machinery sector noted that sales are down from last year, a negative sign for manufacturing strength as a whole.  Comments also suggest that the downturn in oil and gas markets is impacting demand in a number of industry sectors.

In recent days, financial stresses have gained increased visibility on the global scene, including debt-related chaos in the Eurozone and financial market concerns in China.  They serve to reinforce the still precarious nature of the global recovery from the 2008-2009 recession.  Global difficulties have weakened U.S. export demand and reinforced long-standing weakness in the growth of U.S. capital equipment expenditures.  Both are critical sources of business for the U.S. factory sector, whose short-term performance prospects remain murky.  Even moderate growth is at risk.