June Report Shows Manufacturing Continues to Contract

However, the Institute for Supply Management's monthly index indicates pace of contraction is slowing, and a few positive trends appear.

For the 17th consecutive month, economic activity in manufacturing has failed to grow, according to the Institute for Supply Management's (ISM) monthly "Manufacturing ISM Report on Business." The ISM's June Purchasing Managers Index (PMI), on which the report is based, registered at 44.8%, compared with 42.8% in the previous month. A reading above 50% indicates that the manufacturing sector is growing; a reading below 50% indicates that it is generally contracting. As the percentage approaches 50, the contraction occurs at a slower rate.

Of the indices that comprise the PMI, the Production Index grew to 52.5 from 46 in the previous month, which indicates growth. On the other hand, the New Orders Index slipped back to 49.2 from 51.1 in May.

Despite the continued contraction, seven of 18 industries reported growth in June. Those were: petroleum and coal products; printing and related support industries; wood products; nonmetallic mineral products; miscellaneous manufacturing; chemical products; and primary metals.

"Manufacturing continues to contract at a slower rate, but the trends in the indexes are encouraging as seven of 18 industries reported growth in June," said Norbert J. Ore, chair of the ISM's Manufacturing Business Survey Committee. "Most encouraging is the gain in the Production Index, which is up 12.1 percentage points in the last two months to 52.5%. Aggressive inventory reduction continues and indications are that the de-stocking cycle is at or near the end in most industries, as the Customers' Inventories Index remained below 50% for the third consecutive month. The Prices Index was unchanged from May, indicating that the supply/demand balance is improving. Overall, a slow recovery for manufacturing is forming based on the current trends in the ISM data."

Added Cliff Waldman, economist for the Manufacturers Alliance/MAPI: "The overall ISM Index has now exceeded its September 2008 level, a good sign that the impact of the global financial shock has fully played out in the manufacturing sector and the worst of the sharp decline is now behind us. Nonetheless, a resumption of at least modest production growth does not yet appear imminent and the data offered a number of disappointments. The key new orders component fell from modest growth to a modest contraction, and the backlog of orders fell back a bit after a sharp and encouraging surge since March."

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