US manufacturing activity was in contraction for a third straight month in June on continued weak demand as industries sensitive to high interest rates are reluctant to invest in capacity and laying off employees and trimming inventories despite slight easing in costs, data from the Institute for Supply Management showed. The sector index compiled by the ISM, which shows general direction, edged down 0.2 percentage point to a four-month low of 48.5 after dipping 0.5 point to 48.7 in May, falling 1.1 points to 49.2 in April and rising 2.5 points to 50.3 in March. It was below the median economist forecast of 49.1.

"Demand remains subdued, as companies demonstrate an unwillingness to invest in capital and inventory due to current monetary policy and other conditions," Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement."Production execution was down compared to the previous month, likely causing revenue declines, putting pressure on profitability. Suppliers continue to have capacity, with lead times improving and shortages not as severe."

Fiore also told reporters that the biggest concern is over falling production, and that he does not expect employment to expand in the near term without"some significant increase in demand." He stuck to his remarks made last month that the ISM's main index was now in a lower range of 47 to 51, down from 49 to 53 seen earlier this year, amid concerns over an economic slump in the absence of a rate cut by the Federal Reserve. He continued to say that the manufacturing sector is"stable" without a Fed rate cut during the summer months of June, July, August, when activity slows down seasonally.

Among the five subindexes that directly factor into the manufacturing PMI, the new orders index rose 3.9 points to 49.3 in June after slumping 3.7 points to a 12-month low of 45.4 in May (the weakest since 42.9 in May 2023), but was below the neutral line of 50 for the third straight month. The production index slipped back into contraction territory after three months of indicating growth. It fell 1.7 points to 48.5 in June after dipping 1.1 points to 50.2 in May.

The employment index also showed an eighth month of contraction in the past 12 months, sliding 1.8 points to 49.3 in June after rising 2.5 points to 51.1 in May and climbing 1.2 points to 48.6 in April."Panelists' comments in June indicated a marginal decline in staff reductions compared to May, supported by the approximately 1.3-to-1 ratio of hiring versus head-count reduction comments," Fiore said but added that some firms are still laying off workers to cope with weak demand.

The delivery performance of suppliers to manufacturers was"faster" for the fourth consecutive month. The supplier deliveries index rose 0.9 point to 49.8 after being unchanged at 48.9 in May. This is the only ISM subindex that is inversed; a reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases. The manufacturing inventories index contracted for 17 months in a row. It fell 2.5 points to a four-month low of 45.4 in June after slipping 0.3 point to 47.9 in May.

Among other subindexes, the prices index indicated growth for the sixth month in a row after showing the first increase in nine months in January but the index fell 4.9 points to a six-month low of 52.1 in June after dipping 3.9 points to 57.0 in May and surging 5.1 points in April to 60.9, which was the highest since 78.5 recorded in June 2022."Commodity prices continue to be volatile, especially fuel, natural gas, aluminum and plastics," Fiore said."Steel prices are approaching long-term historical lows." In June, 20 percent of companies reported higher prices, down from 26 percent in May, which is"a clear improvement," he said.

After falling a half point in May to a lower-than-expected 48.7, the ISM manufacturing index is expected to rebound 4 tenths to a still sub-50 level of 49.1.

The manufacturing composite index from the Institute for Supply Management is a diffusion index calculated from five of the eleven sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms nationwide. The survey queries purchasing managers about the general direction (tracked in volumes) of production, new orders, order backlogs, their own inventories, customer inventories, employment, supplier deliveries, exports, and imports. Data on changes in input prices (prices paid) are also tracked. The five components of the composite index are new orders, production, employment, supplier deliveries, and inventories (their own, not customer inventories). The five components are equally weighted. The questions are qualitative rather than quantitative; that is, they ask about the general direction rather than the specific level of activity. Each question is adjusted into a diffusion index which is calculated by adding the percentage of positive responses to one-half of the unchanged responses.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the ISM manufacturing index, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.

The ISM manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. More than one of the ISM sub-indexes provide insight on commodity prices and clues regarding the potential for developing inflation. The Federal Reserve keeps a close watch on this report which helps it to determine the direction of interest rates when inflation signals are flashing in these data. As a result, the bond market is highly sensitive to this report.

Importance
The ISM manufacturing composite index indicates overall factory sector trends. The relevance of this indicator is enhanced by the fact that it is available very early in the month and is not subject to revision.

Interpretation
The bond market will rally (fall) when the ISM manufacturing index is weaker (stronger) than expected. Equity markets prefer lower interest rates and could rally with the bond market. However, a healthy manufacturing sector, indicated by rising ISM index levels, bodes well for corporate earnings and is bullish for the stock market.

The level of the ISM manufacturing index indicates whether manufacturing and the overall economy are growing or declining. Historically, readings of 50 percent or above are associated with an expanding manufacturing sector and healthy GDP growth overall. Readings below 50 indicate a contracting manufacturing sector but overall GDP growth is still positive until the ISM index falls below 42.5 (based on statistics through January 2011). Readings in between these two levels suggest that manufacturing is declining while GDP is still growing but only very slowly.

In addition to the ISM manufacturing composite index, the various sub-components contain useful information about manufacturing activity. The production component is related to industrial production, new orders to durable goods orders, employment to factory payrolls, prices to producer prices, export orders to merchandise trade exports and import orders to merchandise imports.

Vendor (supplier) deliveries are an important component of report. The more slowly orders are filled and delivered, the stronger the economic growth and the greater the potential for inflation. When orders are filled quickly, it means that producers don't have as many to fill.

The ISM manufacturing composite index and its sub-components can be subject to some monthly volatility, making the three-month average of the monthly levels more indicative of the trend.