A gauge of U.S. manufacturing activity in June fell to its lowest level in two years as orders contracted, curbed by lingering supply and labor constraints and some softening in demand. An electronics industry measure of component sales also eased in June, falling into contraction territory for the first time since July of 2020.
The Institute for Supply Management’s PMI declined to 53 percent last month from 56.1 percent in May. New orders dropped nearly 6 points to 49.2, the lowest reading since May 2020 when the economy was recovering from the impact of Covid-19. Any reading above 50 indicates expansion.
Overall, June was a mixed bag for the electronics industry. Computers and electronics were one of the ISM’s top 5 growth sectors in June. “Backlog is high, but incoming orders [are] slowing this month,” a tech executive told the ISM.
At the same time, the ECIA’s Electronic Component Sales Trend Survey (ECST) index dropped below the benchmark of 100 in June, indicating negative growth. The index for all major component categories measured below 100 driving an overall average of 97.5 for the month. Similarly, the end-market sentiment registered at 93.2 for June, in line with forecast expectations in May.
Since there were several trends favoring procurement last month no one is committing to the “R-word.” Pricing expansion slowed by nearly 4 percent according to the ISM, to 78.5 from 82.2 in May. Delivery times and backlogs are easing, and production grew 0.7 percent to 54.9 from 54.2 the prior month. Although factory employment dropped by 2.3 percent in June, ISM manufacturing survey chair Tim Fiore said hiring efforts remain robust.
“Panelists indicated month-over-month improvement in ability to hire in June,” he said. “Challenges with turnover [quits and retirements] and resulting backfilling continue to plague efforts to adequately staff organizations, but to a lesser degree compared to the previous month.”
If companies were concerned about demand falling off, they wouldn’t be hiring, he added. “If lead times – which are still at record highs – come down and hiring freezes are announced in July, that will be a different matter. But record lead times are good news for the economy because no one is seeing a drop off in demand.”
Companies improved their progress on addressing moderate-term labor shortages at all tiers of the supply chain, according to the ISM, reporting lower rates of quits compared to May. Sentiment remained optimistic regarding demand, with three positive growth comments for every cautious comment. Panelists continue to note supply chain and pricing issues as their biggest concerns.
June’s drop in new orders was disappointing, said Fiore, and the underlying cause isn’t clear. Demand could be declining, or manufacturers are adjusting demand for excessive lead times, causing order rate adjustments. It could be a combination of both.
“Customers may have over-ordered and are now waiting for lead times to come down and price to soften further,” Fiore explained. The ISM gauge of manufacturer inventories ticked up to 56, near the highest reading since 2010, but customer inventories remain low at just 35 percent. “We would have liked to see production increase, but that remains largely an employment issue.”
Prices for aluminum, ocean freight, plastic resins and steel all declined in June.
“Inputs are getting better, and deliveries are getting faster,” he concluded. Although supplier deliveries, inventories and imports continue to constrain production it was at a lesser level than in May. Imports expanded in June after one month of contraction preceded by six consecutive months of expansion. The prices index increased for the 25th consecutive month, but at a slower rate compared to May.
“As long as lead times stay out at record levels that’s a good signal for demand,” said Fiore. “If you saw demand dropping in the next 3 months or so you’d wouldn’t be hiring.”