The ISM Manufacturing Index fell by -3.1 points to a reading of 53.0 in June (top graph), well below economists’ expectations but still in expansion territory (readings above 50.0). The most notable aspect from today’s report was that the New Orders component (bottom graph) plunged by -5.9 points and is now in contraction territory (readings below 50.0). Many respondents reported that customer demand was slower-than-expected, a marked change from the voracious demand experienced over the last two years.
Historically, six of the nine instances where the New Orders component dropped into contraction while the overall ISM Manufacturing Index remained in expansion were associated with recession. While this does not guarantee that a recession is imminent today, it is yet another warning flag that confirms our view that recession risk is rising.
Eli Petropoulos, CFA – Sr. Market Analyst