Manufacturing activity in the United States has been decreasing over half a year, and the rate of contraction is speeding up. Indicators from indexes measuring factory activity suggest that a recession is on the horizon, and that layoffs will soon intensify in the manufacturing sector. The slowdown also has broad implications for energy prices affecting both the production and consumption sides of the energy market.
This June marked the eighth consecutive month that manufacturing activity has fallen in the United States. Last month’s decrease has brought domestic factory activity to its lowest point in over three years, meaning that rates of production are now as bad as they were when the first wave of Covid was still ravaging markets. The duration of the current contraction is the longest since the great recession of 2008 to 2009. Even more concerning, the pace of the decrease in manufacturing productivity is speeding up – June’s contraction was greater than that in May, according to two brand new reports from the Institute for Supply Management (ISM) and S&P Global.
The Purchasing Managers Indexes (PMIs) from ISM and S&P Global were 46 and 48.4, respectively. By comparison, the ISM PMI was 46.9 in May, and S&P Global's PMI was 48.4 in the same month. According to measures for both indices, readings below 50 indicate contractions in activity, while readings above 50 indicate expansions. The ISM has been below 50 since November of 2022. To put this into greater perspective, the ISM composite manufacturing index slipped from the 14th percentile for all months since 1980 in May, to the 11th percentile in June. Just one year ago, the index was in the 35th percentile at a score of 53.
"Demand remains weak, production is slowing due to lack of work, and suppliers have capacity," Timothy Fiore, chair of the ISM's manufacturing business survey committee, said in a release accompanying the report’s release on Monday. "There are signs of more employment reduction actions in the near term." In other words, lots of people are about to get laid off.
In addition to the reasons cited by ISM, according to industry insiders quoted by Bloomeberg, the current decline of U.S. manufacturing activity is being blamed on a variety of factors including a slowing economy, lower consumer spending, and difficulties hiring and retaining staff.
Trouble in the manufacturing sector also spells trouble for energy markets. “Industrial energy consumption is closely correlated with the manufacturing and freight cycle,” Reuters reported earlier this week. “Freight transport and manufacturing account for more than 75% of all diesel and other distillate fuel oils consumed in the United States, so distillates are the most closely correlated with the manufacturing cycle.” As a result, previously high diesel prices have taken a bit of a dip.
All of this points to a coming recession, and an impending fall in the price of core goods – a silver lining for consumers. However, there are some economic indicators which are not looking as grim as the manufacturing numbers. “At face value, the ISM survey is consistent with an economy that is in recession,” Reuters reports. “But the so-called hard data such as nonfarm payrolls, first-time applications for unemployment benefits and housing starts, suggest the economy continues to grind along.”
This is also true for energy markets, and diesel in particular. However, it doesn’t look like the energy sector is going to take a prolonged hit. Despite lower demand and reversal of previous price increases, there has not been a significant increase in spare capacity nor much of an inventory cushion. This means that if manufacturing exits its slump to resume its growth trajectory, prices will likely skyrocket off of a tight supply.
By Haley Zaremba for Oilprice.com
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