A key index of manufacturing activity tracked by The Federal Reserve Bank of Philadelphia’s monthly survey of manufacturers fell sharply to 0.3 in June from 16.6 a month earlier, well below the consensus of 10.4. It was the index’s lowest reading since February, when it hit zero. Any reading above zero indicates improving conditions.
Source: Federal Reserve Bank of Philadelphia
Lower prices were a significant contributor to the index’s sharp drop. The current prices received index, which reflects manufacturers’ own prices, plunged by 17 points to 0.6, its lowest level since October 2016.
Manufacturers “suggest weaker regional manufacturing conditions compared with last month,” the regional central bank said, noting that new orders, shipments and employment also fell this month. The results–which reflect May data–are part of the bank’s monthly Manufacturing Business Outlook Survey.
It’s important to note that the survey was conducted in the early part of the June, during the Mexico tariff fiasco, so it shouldn’t be a surprise there was weakness from April levels. Note that the key Philly new orders and employment indexes fell by only 2.7 and 2.8 points, respectively; the headline sentiment measure is more volatile and more immediately responsive to developments over trade. With Mexico tariffs now off the table (at least in the near term), I would expect the headline index to rebound in May, provided there are no further escalations in the U.S. trade war with China.
Overall, the fundamental outlook for U.S. manufacturing appears to be stable. China’s cycle is starting to turn up, thanks to policy stimulus, and the U.S. indicators should follow, provided there are no further escalations in trade tensions.