Today, the Institute for Supply Management (ISM for short) released the June Issue of their monthly Manufacturing Report on Business.Â The report is always eagerly anticipated as a barometer of the state of the U.S. economy.
The current report is troubling as it revealed a slowing economy, led by a significant contraction in manufacturing and the export of manufactured goods.Â Interestingly, the industries comprising metals manufacturing grew strongly during the period, despite the contraction in manufacturing overall.
Analysts and observers are attributing the continued slowdown and reversal in manufacturing to uncertainty driven by financial crises and economic stagnation in Europe as well as a slowdown in China.
The Overall U.S. Economy
The ISM Purchasing Managers Index (PMI), which covers the overall economy fell 3.8% from 53.5% in May to 49.7% in June.Â A fall below 42.6% on the index would indicate a contraction in the economy.Â Thus the interpretation is that the economy continued growing in June, albeit at a significantly slower pace than in May.Â Annualizing the June reading suggests that the economy is growing at a rate of 2.4%.Â According to the index, this is the 37th consecutive month of an economic expansion that has begun to slow.
Manufacturing is likely an important driver of the economic slowdown that is threatening, what has been considered by some, a controversial recovery.Â The sector represents roughly 13% of the U.S. economy.Â Ominously, in June, manufacturing contracted for the first time in 3 years, since July 2009.Â Â A fall below 50% on the PMI represents a contraction in the manufacturing sector.Â As indicated above, the index fell below this level last month.
The ISM Manufacturing Report is based on 11 different indexes, including the PMI.Â Perhaps the most alarming of these individual indicators are the contraction in New Orders and Exports.Â These indexes fell an attention-grabbing 12.3% and 6% respectively. Â The New Orders Index fell from 60.1% in May to 47.8% in June, where the breakeven threshold is at 52.3%, and the index for New Export Orders fell from 53.5% in May to 47.5% in June. Â Â Worryingly, this represents the first contraction of the Export Index since June 2009.
The Production Index also declined by 4.6%, reflecting a slowdown from 55.6% to 51%.Â In fact, of the 11 indexes included in the study, 8 reported contractions or a negative change.
Intriguingly, despite a slowdown in the overall economy and a general contraction in manufacturing, the metal industries within the manufacturing sector reported growth.Â The Manufacturing Report is comprised of 18 different industries broadly representing the U.S. economy.Â These industries are derived from the NAICS industry list.Â In total, 7 of the 18 industries reported growth, including Fabricated Metal Products, which was 3rd in terms of growth. Â Machinery and Primary Metals took 6th and 7th place respectively among industries showing growth in June.
All three metal industries showed growth in imports and domestic employment during the month.Â Individually, Fabricated Metal Products also showed growth in production, new orders, and new export orders.Â The Machinery industry reported production growth also while Prime Metals reported growth in new orders and its order backlog.
In addition, sentiment among the purchasing and supply executives within the metal industries was positive.Â Here are quotes contained in the report from each:
- “The economy and general business seem to be getting better even though recent data say otherwise.” (Fabricated Metal Products)
- “Business is still strong, with some nagging question whether it will be sustained.” (Machinery)
- “Business continues to exceed forecast in all markets.” (Primary Metals)
Of the 18 industries surveyed, only 2 others had a positive outlook.Â These were Transportation Equipment, and Petroleum and Coal Products.
For those who might be wondering, Fabricated Metal Products manufacturing includes things like forging, stamping, cutlery, hand tools, architectural and structural metals, boilers, tanks, shipping containers, springs, wire, machine shops, etc.Â For comparison, Primary Metals includes things like iron and steel mills, base metals refining (e.g. aluminum, copper, zinc, nickel, lead and tin), and foundries.Â Â Finally, Machinery includes manufacturing for agriculture, construction, mining, industry, commercial purposes, the service industry, HVAC, metalworking, engines, turbines, power transmission, etc.
A comparison of the industries which contracted during June to those which grew during the month is instructive.Â Of the 18 industries covered in the report, it appears that those related to consumer products or consumables led the decline while those oriented towards durable goods experienced growth.Â For example, the following industries experienced contraction:
- Food, Beverage & Tobacco Products
- Petroleum & Coal Products (experiencing strong competition from natural gas)
- Computer & Electronic Products (although somewhat durable, considered consumable due to relatively short lifespan)
- Chemical Products
- Plastics & Rubbers (used for consumer packaging among other things)
- Paper Products
- Apparel, Leather & Allied Products
In comparison, the following industries experienced growth:
- Furniture & Related Products
- Printing & Related Support Activities
- Fabricated Metal Products
- Misc. Manufacturing (products such as medical equipment and supplies, jewelry, sporting goods, toys and office supplies)
- Electrical Equipment, Appliances & Components
- Primary Metals
The U.S. economy, as the largest in the world, has been oriented towards consumption and as such has been heavily reliant on cheap imports.Â However, the dollar has been declining over the last decade, slowly undermining the dependence on imports.Â The declining dollar will tend to make imports more expensive over time.Â At some point this will make domestic products and hence domestic manufacturing more attractive. Â Could the June Manufacturing Report be heralding such a shift?Â It is much too early to tell, but the report will bear watching over the coming months.
So far, it appears that despite intensifying economic weakness in the U.S., metal industries remain robust and this has positive implications for base metal demand.
A Closing Note
For those who may be unfamiliar with the ISM, they have been around since 1915 and their Manufacturing Report on Business is an internationally recognized and widely-followed publication.Â As highlighted on their website,
â€œExcept for a four-year interruption during World War II, the Report has been published monthly since 1931 for the guidance of supply management professionals, economists, analysts, and government and business leaders.â€
The 11 indexes used as the basis for the Manufacturing Report are derived from surveys of manufacturing executives in selected industries based on their contribution to U.S. GDP.Â Again, to quote their website,
â€œThe Institute’s Business Survey Committee, composed of more than 300 purchasing and supply executives from across the country, provide the data.â€