U.S. Manufacturing: Still Expanding but at a Slower Pace

Manufacturing in the U.S.
Manufacturing in the U.S.

The Institute for Supply Management's manufacturing index for June is a classic glass-half-full, glass-half-empty statistic. The optimists will point to the fact that the U.S. manufacturing sector continued to expand in June -- its 11th straight month of growth. The pessimists will argue that the June index's plunge to 56.2 from 59.7 in May represents another sign of a slowing economic recovery in the world's largest economy.

A Bloomberg survey had expected the manufacturing index to dip to 59 in June. The index was at 60.4 in April. Readings above 50 indicate an expansion; under 50, a contraction. In June 2009, the index was at 45.3.

Other key index components also fell in June. The closely watched new orders component, a measure of future demand, continued to show an expansion with demand in the pipeline, but it nevertheless tumbled to 58.5 from 65.7. The employment component dipped to 57.8 from 59.8 in May -- a reading that suggests that the recent trend of job growth in the nation's manufacturing sector likely slowed somewhat in June.

And the production and prices-paid components also fell. The production component declined to 61.4 from 66.6 in May, and the prices-paid component plummeted to 57 from 77.5. Again, both remain at levels consistent with a factory sector that's expanding (more production, adding employees), but each points to a slowdown in that growth.

"Solidly Entrenched in the Recovery"

Norbert J. Ore, chairman of the ISM's Manufacturing Business Survey Committee, views these drop-offs as a normal period of adjustment, given the factory sector's strong recovery over the past year.

"The manufacturing sector continued to grow during June; however, the rate of growth as indicated by the PMI slowed when compared to May. The lower reading for the PMI came from a slowing in the new orders and production indexes," Ore said in a statement. "We are now 11 months into the manufacturing recovery, and given the robust nature of recent growth, it is not surprising that we would see a slower rate of growth at this time. The sector appears to be solidly entrenched in the recovery."

ISM survey respondents' comments in June also confirmed an ongoing manufacturing expansion, but one that has cooled slightly:

"Component lead times are increasing sharply" (computer and electronics products segment).
"Market had begun to change, but it is now declining again" (wood products segment).
"BP (BP) oil spill will impact business conditions over the next few months" ( fabricated metals segment).
"Retail sale are strong for both the domestic and international products markets" (food, beverage, and tobacco products segment).

In sum, the June ISM manufacturing index confirmed an ongoing factory expansion, but one that moderated this month. If that slower factory growth rate continues, it would suggest, given manufacturing's to-date lead role in the expansion, that U.S. GDP growth will moderate in the second half of 2010. That will complicate policymakers' task to substantially lower the country's 9.7% unemployment rate.