WASHINGTON, July 4 (Reuters): US manufacturing slumped further in June, reaching levels last seen when the economy was reeling from the initial wave of the COVID-19 pandemic, according to a survey on Monday that also showed price pressures at the factory gate deflating.
Factories are resorting to laying off workers to manage headcounts, which ISM Manufacturing Business Survey Committee Chair Timothy Fiore said was "to a greater extent than in prior months," also noting that views about when "significant" growth would return were mixed.
At face value, the ISM survey is consistent with an economy that is in recession. But the so-called hard data, including nonfarm payrolls, first-time applications for unemployment benefits, consumer spending and housing starts, suggest the economy continues to grind along.
Risks of a downturn have, however, increased as businesses and consumers deal with the 500 basis points worth of interest rate increases from the Federal Reserve since March 2022, when the US central bank embarked on its fastest monetary policy tightening campaign in more than 40 years.
"This provides further reason to suspect that a recession is on the horizon," said Andrew Hunter, deputy chief US economist at Capital Economics.
The ISM's manufacturing PMI dropped to 46.0 last month, the lowest reading since May 2020, from 46.9 in May. That marked the eighth straight month that the PMI stayed below the 50 threshold, which indicates contraction in manufacturing, the longest such stretch since the Great Recession.
Economists polled by Reuters had forecast the index edging up to 47. Manufacturing, which accounts for 11.1 per cent of the economy, contracted at a 5.3 per cent annualized rate in the first quarter, government data showed last week.
Some pockets of strength remain, however, amid solid demand for goods like transportation equipment, machinery as well as electrical equipment, appliances and components.
The ISM survey showed that transportation equipment was the only one of the six biggest industries reporting growth last month. But even so, makers of transportation equipment expressed worries that second-quarter sales could decrease and boost inventory levels. They projected total end-of-year sales "to be about where we were last year."
Apart from the exorbitant borrowing costs, manufacturing is also being undermined by spending shifting to services from goods, which are typically bought on credit.
Businesses are also carefully managing inventories in anticipation of weak demand. Business inventories increased at their slowest pace in 1-1/2 years in the first quarter.
