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Manufacturing sector cools off amid heat wave

Throughout the recovery, we've often been able to turn to the manufacturing sector for upbeat, or at least more optimistic, economic reports. However, the report on business conditions for manufacturers in June issued on July 9 from the Institute for Supply Management (ISM) was not one of those reports. The ISM's Purchasing Managers Index (PMI), an economic bellwether for the overall U.S. economy, gave up nearly 4 index points, declining to 49.7. Anything below 50 in the index is considered to indicate contraction within the manufacturing sector. Prior to June's report, the sector had been in an expansion mode for 36 consecutive months, according to the national survey of purchasing managers.

On top of the national ISM report, a number of regional manufacturing surveys have also lent credibility to the ISM's national report. The one closest to home for us here at the Atlanta Fed is the Southeast PMI, produced by Kennesaw State University's Econometric Center. Though the Southeast PMI didn't slip into the territory that indicates contraction, it decelerated nearly 7 index points, reaching 51.3 in June.

Perhaps the most disappointing portion of the Southeast PMI report was that a key forward-looking subcomponent of the PMI—the new orders index—fell a sharp 9.6 index points in June. This drop put the new orders index at 48.5, shy of the 50-point benchmark indicating growth. The production subcomponent, a gauge of current manufacturing activity, dropped 10 index points to reach 53.7, the largest decline of any subcomponent in the June survey. However, the reading still indicates production growth.

Another interesting facet of these reports is that manufacturers report paying less for their inputs. Indexes measuring prices paid by manufacturers haven't seen readings this low since the National Bureau of Economic Research declared the recession over in 2009.

Similar regional surveys from the Federal Reserve Banks of New York and Richmond show that manufacturing activity cooled as temperatures heated up along the East Coast last month. This summer, I'm hoping that the temperatures cool down and the manufacturing sector heats up.

Photo of Mark CarterBy Mark Carter, a senior economic analyst in the Atlanta Fed's research department

July 10, 2012 in Manufacturing , Southeast | Permalink


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