Latest ISM Report Shows Manufacturers Still In Pretty Good Shape

New orders bode well for future.

While the latest report from the Institute for Supply Management showed a modest cooling in the manufacturing sector in June, including a drop in employment, there's nothing to suggest the industry is facing a dramatic slowdown.

Norbert Ore, chair of the ISM's Manufacturing Business Survey Committee, said in an interview with that the improvement seen in the new-orders component of the survey more than offsets the decline in hiring and in some of the other areas of softness.

The ISM's overall PMI index slipped to 53.8 from May's 54.4, and the employment index dropped to 48.7 from 52.9. (A reading above 50 generally indicates growth, while readings below 50 indicate contraction.)

New orders in Monday's report, however, rose to 57.9 from 53.7.

"This was a real positive report," Ore said. "New orders are the leading indicator of what manufacturing is all about, and seeing that 4.2% improvement after the decline that we've seen recently is encouraging."

Indeed, Ore says the uptick in new orders makes it a pretty good bet that the employment index will climb back above the 50 mark soon.

"What's also encouraging is that manufacturers usually do better in the second half of the year because of the holidays," he said. "So we're set up for a pretty good start to the third quarter."

Ore said 14 industries reported growth in the June report, with petroleum, not surprisingly, still going strong. Primary metals, technology and fabricated metals were also among the groups that continue to experience strength. He also noted that the transportation sector, including railcars and aircraft, appear to be in good shape.

The ISM report came on the same day the Commerce Department said construction spending fell in May by the largest amount in almost two years. Manufacturers play a large role on the construction side, and Ore said that area has likely peaked.

"The fact that month-over-month we're seeing a slower rate of growth in manufacturing - I think we can give the (Federal Reserve) credit for that," Ore said. "It would seem to me they have another rate increase in mind, and than they'll probably go to a wait-and-see approach."

There is nothing in Monday's report, though, to suggest the Fed has overdone it yet. Ore said various studies have been done that show the Fed is often in a tightening mode when the PMI index is above 50, while it’s more inclined to lower rates when the index drops below 50.

"I would hope they will soon be finished, and could even see them reversing themselves" in the not-too-distant future, Ore said.

Among some of the other indexes reported by the ISM Monday, prices paid dipped to 76.5 from 77, inventories fell to 46.9 from 48, customers' inventories edged up to 45.5 from 44, and production fell to 55.1 from 57.2.

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