Manufacturing was better than expected in June, but inflation remains muted

Key Points
  • The ISM Manufacturing Index, a closely watched economic barometer, was at 51.7 in June, a decline from 52.1 in July but ahead of the 51.3 Wall Street estimate.
  • Employment and production were the strongest points in the report, while inflation and new orders were among the weakest.

Manufacturing activity was surprisingly strong in June, according to a closely watched gauge leased Monday that also pointed to a rebound in hiring.

The ISM manufacturing index turned in a reading of 51.7, lower than May's 52.1 but ahead of Dow Jones expectations of 51.3. The number represents the share of businesses that expanded activity during the month, so anything about 50 represents growth.

Internally, the report showed growth was mixed.

On the upside, the employment index showed 54.5, up fro the May's 53.7, a month when nonfarm payrolls grew by just 75,000 and triggered worries of a hiring slowdown. Economists expect a June payrolls of 160,000.

Production also showed a sharp increase at 54,1, up from 51.3, while supplier deliveries fell to 50.7.

"Against the backdrop of a slower economy and heightened uncertainty on the trade front, the fact that manufacturers are not only hiring but doing so at a faster pace suggests a degree of confidence in the business outlook," said Jim Baird, chief investment officer at Plante Moran Financial Advisors.

On the contraction side, inventories, which are a key component of GDP, fell to 49.1, while prices paid slumped to 47.9, a fall from 53.2 and further indication that inflation pressures remain muted despite the Federal Reserve's decade-long effort to induce what it considers a healthy level.

Also, new orders was at 50, a slide from 52.7 and indicative of worry about conditions ahead.

"That is consistent with durable goods orders continuing to fall outright in the months ahead. Part of that weakness clearly reflects the subdued global backdrop and escalation in tariffs," Michael Pearce, senior U.S. economist at Capital Economics, said in a note.

Business comments "reflect continued expanding business strength, but at soft levels," Timothy Fiore, ISM chair, said in a statement. Fiore called sentiment "evenly mixed" from respondents who expressed concern over the U.S-China trade battle and the possible extension into Mexico, along with slowing global growth.

Out of 18 individual industries, 12 reported growth for the month.

Panelist comments indicated a wide level of concern about tariffs, with a computer and electronics executive saying they are "wreaking havoc with supply chains and costs."

However, a food, beverage and tobacco respondent said "global demand remains very strong" while a transportation equipment official said demand in 2019 has softened but the outlook for 2020 is "looking stronger."