Source: Wells Fargo Securities Economics Group
Manufacturing Activity Pulls Back on Global Concerns
Marking the first reading below the key "50" level since July
2009, the ISM manufacturing index fell to 49.7 in June. On a
related note, the June Markit U.S. PMI also pulled back,
confirming the slower pace of manufacturing activity.
The biggest surprise was in the forward-looking new orders
index, which plunged to 47.8 from 60.1 in May. New export
orders also fell into contraction territory last month.
Slower Growth Expected in the Second Half of 2012
Given the softening performance we have seen in other economic
indicators, it is of little surprise to us that manufacturing activity
continues to cool. Today's report will certainly cause the market
to question the sustainability of the economic recovery in our
opinion. With the European recession deepening and Chinese
growth slowing, the pace of manufacturing activity should
remain under pressure in the second half of the year.
Factory Orders Reaffirmed Manufacturing Sector Downshift
Factory orders bounced back in May, posting a 0.7 percent increase after
two months of consecutive declines. New factory orders excluding the
volatile transportation component rose 0.4 percent. Capital goods orders
rose 2.3 percent for the month; however the rebound was not enough to
compensate for the sharp pullback over the previous two months. The
three-month annualized rate of capital goods orders declined 6.9 percent as
of May suggesting that business investment will likely be much weaker in
the second half of the year. Defense orders came back, posting a 7.7 percent
increase after a sharp pullback in April.
In general, the report provided a modest upside surprise from consensus;
however, the rebound was not enough to offset the pullback in new orders
in March and April. When this data is taken into perspective with the
regional manufacturing indices and the ISM survey, there emerges a clear
picture of a weakening manufacturing sector. Weakening global economic
conditions along with softer consumer demand and evidence of slower
business investment lead us to believe that manufacturing production will
continue to slow in the months ahead. We reiterate our view for subpar
economic growth around 1.5 percent for the second quarter.
Upward Revisions to Initial Estimates
While factory orders remained fairly weak for the month, there was some
good news in the report as orders for both durable goods and capital goods
excluding nondefense aircraft were revised upward. Durable goods orders
were revised higher to 1.3 percent from the originally reported 1.1 percent
increase. Nondefense capital goods orders excluding aircraft also rose m0re
than expected in May, increasing 2.1 percent as opposed to the originally
reported 1.6 percent rise. Given the upward revisions to these numbers, the
negative hit to the manufacturing sector has been reduced somewhat.
Shipments Rise as Inventories Remain in Check
Total shipments rose 0.5 percent for the month with shipments of durable
goods rising 0.8 percent and nondurable shipments rising for the first time
in two months, up 0.2 percent. Shipments of transportation equipment
accounted for most of the rise in shipments, posting a 1.6 percent increase.
The inventories-to-shipments ratio fell for to 1.27 months from April's 1.28
months, marking the first decline in the ratio since December 2011. The
slight drop in the I/S ratio likely reflects the pullback in oil prices rather
than manufacturers electing to hold less inventory on hand. Nondurable
inventories, which capture oil inventories, have pulled back in each of the
past three months coincides with the fall in petroleum prices. Inventories of
nondefense capital goods excluding aircraft are still up, increasing
0.5 percent for the month.