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US manufacturing sector shows strength in 'difficult conditions': ISM, IHS

Javier E. David
Editor focused on markets and the economy
Serious busy young black factory engineer in hardhat and safety goggles examining milling lathe and repairing it while working at production plant

The U.S. manufacturing sector showed unexpected resilience last month, according to two industry surveys released on Monday, bolstered by modest gains that defied the gravitational pull of the U.S.-China trade war and a slowing economy.

The IHS-Markit Purchasing Manager’s Index checked in at 50.6 in June, up from 50.1 in the prior month and in line with/below expectations of 50.1.The headline was helped by modest gains in new business, IHS said.

Separately, the ISM Manufacturing Survey also beat market expectations. The index dipped to 51.7 from the prior reading of 52.1 — but above Wall Street’s consensus forecasts of 50.0.

Anything below 50 indicates business conditions are contracting.

Still, much of the damage from the bilateral trade dispute has already been felt across multiple sectors, and sown widespread fears about the health of the U.S. economy.

The trade war has forced businesses to rethink hiring and investment, and some of that trepidation was evident in both the ISM and IHS surveys.

“June data signaled a further near-stagnation of operating conditions across the U.S manufacturing sector. The rate of overall growth held close to May's near-decade low,” IHS-Markit said. In fact, June’s figure was among the weakest readings of the last few years.

Conversely, the ISM data showed that new orders stagnated during the month even as consumption expanded.

“On a positive note, the rate of output growth quickened slightly amid a renewed rise in new orders. However, in line with muted increases in output, firms reined in staff hiring, expanding workforce numbers at the slowest pace for almost three years,” the IHS survey noted.

“Subsequently, output expectations remained subdued,” it added.

U.S. manufacturers “registered a faster rise in production in June,” Timothy Fiore, chair of the ISM’s manufacturing business survey committee, said in a statement.

“Nevertheless, the rate of expansion was only moderate and the second-slowest since June 2016 (behind May's recent low), as firms continued to report difficult demand conditions,” he added.

‘Wreaking havoc’

Over the weekend, President Donald Trump and his Chinese counterpart, Xi Jinping, struck a truce at the G20 summit, which sent stocks on a tear Monday.

Despite the encouraging development at the G20 meeting, the ongoing Sino-American dispute is still far from resolved. The cloud of uncertainty hanging over the world’s two largest economies is stoking fears about the economy, and led to policy responses by both Beijing and Washington.

“China tariffs and pending Mexico tariffs are wreaking havoc with supply chains and costs,” one respondent told the ISM in the June survey.

“The situation is crazy, driving a huge amount of work [and] costs, as well as potential supply disruptions,” the person said.

Wall Street watchers saw the data as possibly instructive for the Federal Reserve, which is expected to cut interest rates as early as this month.

While the ISM’s headline managed to beat expectations, economists at Capital Economics pointed to the slide in forward-looking new orders as potentially ominous.

“Overall, this report is probably not enough to move the needle much in either direction on Fed rate cuts,” the firm noted.

“But with global demand set to remain subdued, and the tariff truce agreed at the G-20 summit likely to prove temporary, we expect US manufacturing activity to remain weak in the second half of this year,” it added.

Javier is an editor for Yahoo Finance. Follow Javier on Twitter: @TeflonGeek

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