U.S. manufacturing activity pulled back in June following a strong surge the month before, as some of the momentum from businesses rushing to stock up ahead of potential shortages and price increases tied to the Middle East conflict began to wear off.
The Institute for Supply Management reported Wednesday that its manufacturing Purchasing Managers’ Index fell to 53.3 in June, down from 54.0 in May — which had been the strongest reading since May 2022. Any reading above 50 signals that the manufacturing sector is growing. Manufacturing makes up about 9.4% of the overall U.S. economy. Economists surveyed by Reuters had expected the index to hold steady at 54.0.
Even with June’s slight dip, U.S. factories have now posted six consecutive months of growth. That stretch has been supported in part by a surge in artificial intelligence investment, which has helped cushion the blow to the manufacturing sector from the U.S.-Israel war with Iran.
The ISM survey’s new orders measurement dropped to 56.0 in June from 56.8 in May — still a strong number. Order backlogs also declined after climbing the month prior, and exports shrank during the period.
On a more positive note, factory inventories bounced back after an extended period of decline. Supply chains also showed some improvement, likely tied to a fragile ceasefire in the ongoing conflict. The survey’s supplier deliveries index fell to 57.4 from 60.6 in May — with readings above 50 indicating that deliveries are taking longer than usual.
That modest easing in supply chain pressure helped slow the rate at which factory-level inflation was climbing.
The index tracking what factories pay for their inputs dropped to 73.0 in June from 82.1 in May — still a notably high level. The tentative truce in the conflict has helped bring oil prices back down to where they were before the war began. However, prices are expected to stay elevated as spending on artificial intelligence continues to drive up costs for technology components such as semiconductors and electronics.
Financial markets are anticipating that the Federal Reserve will raise interest rates this year in response to ongoing inflation. The nation’s central bank held its key overnight lending rate steady this month in the range of 3.50% to 3.75%, but updated projections from policymakers indicated they expect to push borrowing costs higher before the year is out.
Employment at U.S. factories remained weak. Since January 2023, the ISM’s manufacturing employment index has shown contraction in 40 out of 41 months.
