June data highlighted strengthening business conditions across the U.S. manufacturing sector. At 51.4, up from 50.7 in May, the seasonally adjusted Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered above the crucial 50.0 no-change threshold and signalled the fastest improvement in operating conditions for three months.
Relatively weak PMI readings during April and May meant that the average for the second quarter of 2016 (51.0) was the lowest seen since Q3 2009. However, the latest reading pointed to a recovery in growth momentum following the six-and-a-half year low recorded in May. Higher output levels provided a boost to the headline index in June, alongside faster growth of new orders and employment.
Manufacturers indicated a modest rise in production volumes during June, which survey respondents mainly linked to signs of a rebound in customer demand and a corresponding upturn in new work. The latest increase in new business was the strongest since March, although subdued in comparison to the post-crisis average. New orders from abroad expanded at the fastest pace for almost two years, suggesting an additional boost to growth from greater export sales in June.
Despite stronger new business growth, a number of manufacturers noted that heightened economic uncertainty had led to delayed decision making and greater risk aversion among clients in June. Moreover, concerns about the business outlook contributed to tighter inventory management across the manufacturing sector. Stocks of purchases fell at the fastest pace since January 2014, while post-production inventories dropped at the second-fastest pace recorded so far this year. At the same time, supplier lead-times lengthened to the greatest extent since last September, which some firms linked to lower stocks among vendors.
While manufacturers indicated sustained caution in terms of their stock policies, this contrasted with more positive trends for staff recruitment in June. Employment growth picked up further from the near three-year low record in April, in part reflecting a renewed increase in backlogs of work across the manufacturing sector. Volumes of work outstanding rose for the first time since the start of 2016, thereby suggesting greater capacity pressures among manufacturers in June.
Meanwhile, input price inflation accelerated again in June. Although still subdued in comparison to the long-run survey average, the latest rise in average cost burdens was the fastest since November 2014. There were a number of reports citing higher raw material prices in June, especially for steel. Greater input prices in turn contributed to the strongest increase in factory gate charges since January.
Chris Williamson, chief economist at Markit said
Domestic demand was again worryingly weak, especially from business customers, meaning overall growth of order books remained subdued.