U.S. manufacturers reported another widespread decline in business activity during June, which continued to weigh down industrial energy consumption and prices.
The Institute for Supply Management's (ISM) composite manufacturing index slipped to 46.0 (11th percentile for all months since 1980) in June from 46.9 (14th percentile) in May and 53.0 (35th percentile) a year earlier.
The composite index has fallen to the lowest level since the recession associated with the first wave of the coronavirus pandemic in 2020 and before that the recession caused by the financial crisis in 2008, signifying a major downturn in the industrial sector of the economy.
The indicator has been below the 50-point threshold dividing expanding activity from a contraction continuously for eight months since November 2022 (Report on Business, Institute for Supply Management, July 3).
The length of the downturn puts it somewhere between a mid-cycle slowdown (generally eight months or fewer) and a full cycle-ending recession (generally 11 months or more).
Chartbook: U.S. industrial energy use
The forward-looking new orders component rose to 45.6 (9th percentile) in June up from 42.6 (6th percentile) in May but was still down from 49.2 (19th percentile) a year ago.
The new orders index has been below the 50-point threshold in 12 of the last 13 months and the current level implies the downturn is likely to last for at least several months more.
Manufacturers also reported jobs declined in June (48.1) but the change in employment was relatively moderate (42nd percentile) confirming many firms are hoarding labour despite sluggish output and orders.
ENERGY CONSUMPTION
Industrial energy consumption is closely correlated with the manufacturing and freight cycle.
Freight transport and manufacturing account for more than 75% of all diesel and other distillate fuel oils consumed in the United States, so distillates are the most closely correlated with the manufacturing cycle.
The volume of distillate fuel oil supplied to domestic consumers in the three months from February to April was down -1.0% compared with the same period in 2022, consistent with the slowdown in industrial activity.
Industrial electricity use was also down almost -1.9% in the three months from January to March compared with the same period a year earlier, according to data from the U.S. Energy Information Administration.
Softness in diesel and electricity consumption is consistent with the moderate but persistent downturn in manufacturing evident in ISM surveys since the middle of 2022.
It has helped take some of the pressure off diesel and electricity supplies and reversed the previous upward trend in prices.
But the downturn has not been deep enough to create much spare capacity or, in the case of diesel, a comfortable inventory cushion.
If the expansion resumes after a mid-cycle slowdown it will quickly run into capacity constraints and prompt a new round of price increases.
As a result, traders expect the central bank to raise interest rates one more time to 5.25-5.50% later in July up from 5.00-5.25% at present and keep them there at least through the end of the year.
Expected rates have climbed back to levels prevailing before the regional banking crisis erupted in March 2023 as the priority reverts to inflation control rather than financial stability.
The central bank is expected to keep dousing the embers of inflation from 2021/22 to ensure price increases do not flare up again quickly later in 2023/24.
Related columns:
- Global container freight stuck in doldrums (June 23, 2023)
- U.S. industrial recession hits energy consumption (June 2, 2023)
- U.S. industrial recession cuts diesel and electricity use (May 4, 2023)
- Hard-ish landing has already arrived for U.S. manufacturers (April 4, 2023)
John Kemp is a Reuters market analyst. The views expressed are his own
