ISM Manufacturing Index Shows Capacity Stress

Capacity stress, due to robust demand and also tariff disruptions, is a major concern for ISM's manufacturing sample. ISM's index, up 1.5 points in June to 60.2, topped Econoday's consensus range and got a boost from long delays in supplier deliveries, up more than 6 points to 68.2 to signal the worst disruptions since the oil crises of the mid-70s. Comments from the sample are focused on tariff effects and related uncertainties including the inability to plan ahead.

Yet the delays are not slowing production, up nearly a point in June to 62.3, though effects may be thinning inventories of finished goods which the sample is warning are too low. Input costs, though down slightly at 76.8, are nevertheless extremely elevated.

Order readings in this report continue to run at maximum performance, little changed at 63.5 for new orders and holding over 60 for backlog orders, at 60.1 which is very rare for this reading. Export orders, at 56.3, are holding strong despite tariffs as are import orders, up nearly 5 points at 59.0 in a reading that measures volumes and is not inflated by dollar hikes in tariffs.

Despite all the stress, ISM's sample continues to find available workers with employment steady at a very solid 56.0. Whatever hints there were of slowing in manufacturing, from weakness in the Philly Fed and loss of momentum in the flash PMI, June appears very likely to have been yet another month of acceleration for a factory sector that, tariffs or not, is taking a leading position in the 2018 economy.