US factory activity grows strongly in June; expansion likely to slow in coming months

Factory activity in the US expanded in June at its most solid pace since early June 2015. The ISM manufacturing index rose to 53.2 in June, implying that even if producers continue face tough environment, the obstacles from the dollar’s sharp appreciation and cutbacks in commodity related investment spending have alleviated slightly. However, the headwinds are expected to remain, while growth is likely to be modest in coming months, noted Wells Fargo in a research report.

Almost all sub-indices rose in June. The production index was up 2.1 points, rising to 54.7. Out of 18 industries, just three reported declines. Meanwhile, new orders continued to be strong in growth territory, with the index rising to 57. New orders, combined with increasing backlogs suggest that production will continue to grow in the next two months. Export orders also rebounded, rising to 53.5.

Meanwhile, inventories index was the only segment to have recorded a below 50 reading. The index came in at 48.5. Even if this shows that manufacturers continue to reduce inventories, the 3.5 point rise in the index from last month hints at the drawdowns’ pace is decelerating and provides additional sign that the inventory correction is almost over, according to Wells Fargo.

The recovery in commodity prices in the last few months resulted in additional positive print for prices paid in the last month. The price index dropped three points to 60.5 in June. However, the index showed that input prices for manufacturers keep on increasing at a solid rate in over two years.

Meanwhile, the employment component moved back to positive territory in June after posting below 50 readings for six months. The index rose to 50.4 in June. Employment in manufacturing has been a weak spot in payrolls since the beginning of 2016. Jobs at factories in the US dropped an average of 13,000 per month between February and May. The latest ISM reading implies that the manufacturing sector’s drag on payrolls might be reducing; however, the industry is unlikely to be a source of significant support in the near-term, added Wells Fargo.

The June’s index is expected to have captured certain post-Brexit environment. But it is quite possible that the impacts of Brexit were light in the June data. The report in July might provide additional picture of how renewed worries regarding global growth and dollar’s appreciation will impact manufacturer’s exports and production broadly. The manufacturing activity is expected to continue growing the US; however, the rate of expansion is likely to remain sluggish, according to Wells Fargo.