U.S. manufacturing activity slowed more than expected in June, with a measure of new orders contracting for the first time in two years, more evidence that the economy was cooling amid aggressive monetary policy tightening by the Federal Reserve.
The Institute for Supply Management (ISM) said on Friday that its index of national factory activity dropped to 53.0 last month, the lowest reading since June 2020, when the sector was rebounding from a COVID-19 slump.
That followed a reading of 56.1 in May. A reading above 50 indicates expansion in manufacturing, which accounts for 11.8% of the U.S. economy. Economists polled by Reuters had forecast the index would fall to 54.9.
Though some of the moderation in factory activity reflects a shift in spending back to services from goods, it is in line with recent data showing rising interest rates dampening demand. Consumer spending rose modestly in May, while housing starts, building permits and factory output softened.
The Fed last month raised its policy rate by three-quarters of a percentage point, its biggest hike since 1994, to quell high inflation. Another similar-sized rate hike is expected in July. The U.S. central bank has increased its benchmark overnight interest rate by 150 basis points since March.
The ISM survey's forward-looking new orders sub-index dropped to 49.2 from a reading of 55.1 in May. Despite the first decline below the 50 level since May 2020, manufacturers have plenty of work to keep factories humming.
Backlog orders continued to accumulate at a steady pace.
Though business inventories were revised sharply higher in the first quarter and major retailers like Walmart and Target have reported they are carrying too much merchandise, the ISM survey still viewed stocks at clients as lean.
Some economists perceived the strong inventory build last quarter as a sign that supply chain bottlenecks were easing.
The ISM survey's measure of supplier deliveries tumbled to 57.3 from 65.7 in May. A reading above 50% indicates slower deliveries to factories.
News on inflation was encouraging. A measure of prices paid by manufacturers dropped to a reading of 78.5 from 82.2 in May, supporting the view that inflation has probably peaked.
A combination of waning demand and worker shortages likely resulted in the survey's measure of factory employment declining further to a reading of 47.3, the lowest since November 2020, from 49.6 in May. Technology companies like Tesla have been laying off workers. There were 11.4 million unfilled jobs across the economy at the end of April.
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