According to the latest ISM survey, the US manufacturing sector further slumped during June and has reached the same levels seen during the start of the COVID pandemic. The survey also revealed that the factory gate is deflating in the USA.
The ISM (Institute for Supply Management) survey shows that the manufacturing PMI slumped to 46.0 during June. If we look back, such a low reading was only last seen in May 2020, when a reading of 46.9 was registered.
US Manufacturing Is Contracting
Overall, that's the 8th consecutive month that the PMI index has remained below the 50 index, which is a sign of contraction. What makes the matter even worse is the fact that the recent contraction period can be compared with the great recession.
According to economists, the PMI index was supported to touch 47 during June, but the actual value turned out to be 46.0. In the USA, the manufacturing sector accounts for around 11% of the total GDP, so a contraction means that the US economy is contracting.
However, some sectors of manufacturing remain strong such as electric equipment, machinery, transportation equipment, and appliances.
The real reason behind the problems of manufacturing sector is the 500 basis points of interest rate hikes that were introduced by the Fed since March 2022. If we look at history, the recent policy-tightening campaign is one of the fasts in the last 40 years.
This has pushed the spending toward services which is hurting the spending on goods. According to experts, the reason for less spending on goods is that it is normally bought on credit.
However, some experts believe that the manufacturing sector has yet to experience the full effects of the credit tightening policy that started a few years ago. If this turns out to be true, it would mean further slump in the US manufacturing sector unless the rate hike policy is reversed.