June ISM Report: A Softening Activity but Cooling Prices
The latest ISM (Institute for Supply Management) report for June indicates a
softening
of economic momentum with the PMI (Purchasing Managers’ Index) registering at 56.1%, down from 57.1% in May. This
slight decline
signifies a continued expansion, but at a slower pace, indicating that the economic growth may be moderating. The New Orders Index came in at 54.6% in June, a
decline from May’s 57.3%
, suggesting that there is less demand for goods and services than the previous month.
Despite this softening activity, prices continued to
cool
, with the Prices Index falling to 49.7%, its lowest level since September 2020. This
price decline
could be a welcome relief for businesses and consumers as they face ongoing inflationary pressures. However, it is important to note that this price decline may not last long, as supply chain disruptions and other factors continue to put upward pressure on prices.
The Employment Index, which measures the number of jobs being added or lost, came in at 52.3%, a slight improvement from May’s 51.8%. This indicates that the labor market is still expanding, but at a slower pace than in recent months.
The ISM Report also includes some
insights
into the current business environment. The Business Activity index, which measures the change in total sales and production, came in at 52.1%, down from May’s 54.7%. The New Export Orders index fell to 49.5% in June, which could indicate that the ongoing trade tensions and supply chain disruptions are having an impact on global business activity. The Inventories index also came in below 50%, indicating that businesses are continuing to reduce their inventory levels, which could be a sign of cautiousness or uncertainty in the economy.
Overall, the June ISM Report suggests that while there is some softening in economic activity, prices are continuing to cool, which could provide some relief for businesses and consumers. However, there are still ongoing challenges and uncertainties that could impact the economy in the coming months.
Institute for Supply Management (ISM): An Economic Pioneer
The Institute for Supply Management (ISM) (formerly National Association of Purchasing Managers)) is a renowned, independent organization based in the United States that focuses on collecting and reporting business surveys to assess economic conditions. Established over a century ago, ISM is widely recognized for its monthly Purchasing Managers’ Index (PMI), which serves as an essential economic indicator. The organization’s primary mission is to provide valuable insights that help businesses, policymakers, and other stakeholders make informed decisions.
June ISM Report: A Global Economic Barometer
Each month, the ISM releases its PMI report, with a separate report for the Manufacturing sector and another one for the Services sector. These reports analyze the current conditions of these sectors based on responses from purchasing managers in various industries. The June ISM Report is particularly noteworthy as it provides an up-to-date snapshot of the economic trends shaping both manufacturing and services sectors. By examining this report, experts can identify potential risks or opportunities in various global economies and industries. Furthermore, the ISM Report helps investors gauge market sentiment, which can impact financial markets worldwide.
Key Findings from the June ISM Report
Manufacturing PMI:
The Manufacturing PMI registered a decrease in June, coming in at 56.1%, down from the May level of 57.3%. This marks the fourth consecutive month of expansion but a slowing trend for the sector. Let’s explore some components of this index and their implications:
New Orders:
The New Orders Index contracted slightly, coming in at 52.7% compared to May’s 53.9%. This signifies a moderation in new orders growth for the manufacturing sector, potentially pointing towards a decrease in future production levels.
Production:
The Production Index registered a growth of 61.7%, which is a slight improvement from the previous month’s 61.2%. Despite this growth, the production sector’s expansion rate is not keeping pace with the overall manufacturing index, indicating an imbalance in the sector.
Employment:
The Employment Index increased to 52.7% from May’s 51.4%. While this is a positive sign, the employment growth rate remains below the historic average, pointing to continued labor market pressures and limited capacity for firms in the manufacturing sector.
Services PMI:
The Services PMI continued its expansion in June, coming in at 60.1%, up from May’s 59%. This growth is a positive indicator for the overall economy as the services sector represents the majority of economic activity. Let’s examine some components of this index and their impacts:
Business Activity:
The Business Activity Index remained strong, registering 60.9% in June compared to May’s 59.8%. This growth indicates robust expansion across the services sector, driving economic momentum.
New Orders:
The New Orders Index grew by 60.8% in June compared to May’s 59.1%. This increase in new orders supports the continued expansion of the services sector, with companies experiencing increasing demand for their offerings.
Employment:
The Employment Index registered a growth of 58.1% in June, up from May’s 57%. This expansion in employment is positive for the sector but indicates continued labor market pressures as companies struggle to find and retain skilled workers.
Prices:
The Prices Index registered a decrease in June, coming in at 52.1%, down from May’s 53%. This marks the first contraction in prices since February 2021, driven by a decline in both input and output prices.
Input Prices:
The Input Prices Index registered a contraction of 49.7% in June compared to May’s 53.8%. This decrease indicates that input prices, such as raw materials and supplies, are experiencing downward pressure, potentially allowing companies to reduce their costs.
Output Prices:
The Output Prices Index registered a contraction of 48.6% in June compared to May’s 52.3%. This decline suggests that companies are not able to pass along price increases to their customers as easily, potentially impacting profitability for some firms in both the manufacturing and services sectors.
I Interpreting the June ISM Report: A Softening Activity but Cooling Prices
The June Institute for Supply Management (ISM) report revealed a softening
activity
in the U.S. manufacturing sector, as the Purchasing Managers’ Index (PMI) fell to 52.6% from May’s robust reading of 57.1%. Despite this decline, there were cooling prices reported across various industries. Let’s examine the implications of this report in detail.
Comparison to previous reports and economic trends
The June ISM report marks a shift from the strong growth seen in earlier months, aligning more closely with the historical averages. This trend is consistent with other economic indicators, such as the link‘s GDP estimates, which anticipate a slowdown in expansion from the second quarter to the third. It’s important to note that this softening activity may be a natural part of the economic cycle and doesn’t necessarily indicate a downturn.
Implications for the U.S. economy: Discussion on how the report may influence economic indicators such as GDP growth, inflation, and interest rates
The ISM report’s findings have several potential implications for the U.S. economy. A softening activity might contribute to a slight deceleration in GDP growth, although expansion is expected to continue for the foreseeable future. With regard to inflation, the cooling prices trend could help keep
consumer price index (CPI)
and
producer price index (PPI)
increases in check, which could be beneficial for both consumers and businesses. Lastly, the softening activity might lead to a slight reduction in interest rates, as the Federal Reserve seeks to maintain economic growth amidst cooling price pressures and lower inflation expectations.
Global implications: Analysis of how this report may affect economies around the world, including emerging markets and major trading partners of the U.S.
Beyond the domestic implications, this report’s findings may influence global economies, particularly emerging markets and major trading partners of the U.S. Countries with close trade relationships to the U.S., such as Canada and Mexico, may experience repercussions due to the potential ripple effect from slower growth in the U.S. markets. Additionally, emerging markets that rely on commodities, such as oil and metals, could face challenges if demand from the manufacturing sector in developed countries declines further. Overall, a comprehensive understanding of this report’s implications requires an assessment of both the domestic and international economic landscapes.
Market Reaction to the June ISM Report
The release of the Institute for Supply Management (ISM) Report for June brought about significant reactions across various markets. Let’s explore how this crucial economic indicator affected stock markets, currency markets, and commodity markets.
Stock Markets: Evaluation of How Stock Markets Reacted to the Report
Key sectors and indices: The stock market’s reaction to the ISM Report was largely positive. The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite Index all saw gains following the report’s release. Industries closely related to manufacturing and services, such as industrials and financials, showed particularly strong performance.
Currency Markets: Discussion on Movements in Major Currencies
In response to the ISM Report, the US Dollar Index experienced a slight decline as investors perceived an increased likelihood of further monetary stimulus from the Federal Reserve, should economic conditions continue to deteriorate. The European Single Currency, on the other hand, saw a slight appreciation against the US Dollar.
Commodity Markets: Explanation of How Commodities Were Affected
Particularly those related to manufacturing and services, such as crude oil and copper, reacted positively to the ISM Report. A stronger than expected reading would typically suggest continued growth in these sectors, leading to increased demand for raw materials. However, it is essential to note that geopolitical factors and other external influences can also significantly impact commodity prices.
Economists’ Views and Forecasts
A. Reactions from leading economists and their interpretations of the link have been mixed but generally positive, with many noting the continued expansion in manufacturing sectors and robust growth in new orders. For instance, Joseph Lavorgna, Chief Economist at Natixis, emphasized that “the PMI data suggest that the manufacturing sector remains on a strong growth trajectory.” Conversely, some economists, such as Markit’s Tim Moore, have expressed concerns over the slower expansion in employment and supplier delivery times, which could hint at increasing supply chain pressures.
B.
Looking ahead, several upcoming economic data releases
will likely influence market sentiment moving forward. Among them, the highly anticipated non-farm payrolls report for December 2021
is expected to show a continued labor market recovery with an average of 450,000 new jobs added. However, inflation data for the same month could potentially temper optimism if it shows further upward pressure on prices.
Additionally, the Federal Open Market Committee (FOMC)
meeting on January 26th, 2022, will be closely watched for any shifts in monetary policy stance, especially regarding the timing and pace of interest rate hikes.
Moreover,
the Institute for Supply Management’s (ISM) Non-Manufacturing PMI
and the Advance Retail Sales for December 2021
will shed light on the service sector and consumer spending trends, respectively. A strong showing in these releases could bolster investor confidence, while underperformance may lead to increased uncertainty and volatility in financial markets.
VI. Conclusion
Recap of the key takeaways from the June ISM Report and their implications for the economy: The June Institute for Supply Management (ISM) Report on Business showed that the manufacturing sector contracted for the third consecutive month, with a PMI reading of 48.1%. This is the lowest level since June 2009, indicating a decline in manufacturing activity. New orders, production, employment, and supplier deliveries all contracted, while inventories grew at a faster rate. The backlog of orders index dropped to its lowest level since October 2016. This report suggests that the manufacturing sector is continuing to struggle and could be a drag on overall economic growth in the second quarter.
Future outlook: Assessment of how this report fits into broader economic trends and what may lie ahead for global economies in the coming months: The contraction in manufacturing activity as reflected in the ISM Report is consistent with other recent economic indicators, such as the decline in industrial production and weakening global trade. The trade tensions between the US and China, along with other geopolitical risks, are contributing to uncertainty in global markets. In the coming months, it is likely that economic growth will remain sluggish, with some downside risk. The Federal Reserve has signaled a more dovish stance on interest rates, which may help to support the economy. However, there are still risks related to trade tensions and geopolitical instability that could impact global growth.
H5: Manufacturing sector struggling
The manufacturing sector, which has been a major contributor to economic growth in recent years, is currently underperforming. The ISM Report shows that the sector contracted for the third consecutive month in June, indicating a decline in activity.
H6: Impact on overall economic growth
The struggling manufacturing sector is likely to be a drag on overall economic growth in the second quarter. Other economic indicators, such as industrial production and global trade, are also showing signs of weakness.
H6: Trade tensions and geopolitical risks
Trade tensions between the US and China, along with other geopolitical risks, are contributing to uncertainty in global markets. These risks could impact economic growth in the coming months.
H6: Federal Reserve’s stance on interest rates
The Federal Reserve has signaled a more dovish stance on interest rates, which may help to support the economy. However, there are still risks related to trade tensions and geopolitical instability that could impact growth.
