The U.S. economy is showing signs of a gradual slowdown, as seen in recent data from key sectors like manufacturing and construction.
The manufacturing industry, which often serves as a good indicator of economic health, shrank for the second month in a row in May, according to the Institute for Supply Management (ISM).
The ISM’s manufacturing index fell to 48.7 from 49.2 in April, staying below the important 50-point mark that separates growth from decline.
One of the most notable findings from the ISM survey was the big drop in new orders for goods, which saw their largest decrease in almost two years.
This fall in demand has made businesses hesitant to stock up on inventory and has led to a more cautious outlook among survey participants.
ISM manufacturing PMI fell to 48.7 from 49.2. Reuters estimate was for an increase to 49.6.
We expected this despite the rise in S&P Flash M-PMIs, as regional Fed surveys remained week. Prices paid also fell. pic.twitter.com/wWLcpry35T
— Eric Wallerstein (@ericwallerstein) June 3, 2024
Matthew Martin, a U.S. economist at Oxford Economics, pointed out in a research note that “Higher-than-expected rates this year have reduced business investment and have made businesses more reticent to increase their levels of inventory.”
Adding to the challenges faced by the manufacturing sector, the construction industry also saw an unexpected dip in April.
Construction spending decreased for the second month in a row, mainly due to a decline in non-residential activity.
However, there was a bright spot in the single-family home building sector, which experienced some growth during the same time.
Plummeting Business Orders Sound the Alarm
the cliff-notes:
• the ISM Manufacturing survey showed new orders dropped to 45.4 in May
• employment in manufacturing rose to 51.1
• weakness in manufacturing always leads GDP and forecasts recessionsToday, the manufacturing… pic.twitter.com/TS97KeHkYh
— Joe Consorti (@JoeConsorti) June 3, 2024
These two reports together suggest that the economy is dealing with the ongoing impact of high interest rates, which the Federal Reserve has kept in place to fight stubborn inflation.
As a result, spending on manufactured goods and big projects has been slow, with consumers showing signs of being more careful with their money and closely watching their shrinking savings.
This trend was seen in the drop in consumer spending on goods in April.
The effect of these economic challenges can be seen in the updated growth forecasts for the second quarter.
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While initial predictions had suggested a faster pace of growth following a modest 1.3% increase in the first quarter, the Atlanta Fed’s GDP Now model has since been lowered to just 1.8% in response to the disappointing ISM and construction spending data.
