ISM MANUFACTURING KEY POINTS:
- ISM manufacturing drops to 53.0 in June from 56.1 in May, disappointing market expectations
- The goods producing sector of the economy grows at the slowest pace since June 2020
- While the Federal Reserve has retained a hawkish bias, rapidly weakening economic activity may force policymakers to pivot later in the year
A key gauge of U.S. factory activity grew less than forecast last month, expanding at the weakest pace since June 2020, a sign that the American economy is quickly decelerating as financial conditions continue to tighten in response to the Federal Reserve’s aggressive actions to tame inflation.
According to the Institute for Supply Management, manufacturing PMI dropped from 56.1 in May to 53 in June, versus 54.9 expected, suggesting demand is starting to fall off the cliff. For context, any figure above 50 signals expansion, while readings below that level indicate a contraction in activity.
Looking at the performance of some of the components, production rose modestly to 54.9 from 54.4, but new orders collapsed, sinking to 49.2 from 55.1 previously. Meanwhile, the employment indicator extended its decline, retreating to 47.3 from 49.6, a bad omen for the labor market. Elsewhere, the prices paid index cooled to 78.5 from 82.2, indicating that inflationary pressures may be finally starting to moderate, albeit at a very slow pace.
U.S. gross domestic product shrank 1.6% during the first three months of the year amid softening personal consumption expenditures. Today’s data increases the likelihood of another negative GDP figure for the second quarter, a scenario that could significantly reinforce Wall Street‘s fears of a hard landing.
Immediately after the ISM survey was released, U.S. Treasury rates took a turn to the downside, both at the short and long end, but the U.S. dollar remained bid on haven demand. However, with U.S. yields steadily declining in recent days, the U.S. dollar could start to correct lower in the coming weeks.
US DOLLAR CHART VS US 2-YEAR YIELD