Southpoint

Manufacturing leveled off in the United States and Southeast in June. In fact, most developed countries' manufacturing sectors cooled off last month:

While this doesn't signal an end to the manufacturing sector's recovery, it's clear that growth is slowing. Though each purchasing managers index (PMI) mentioned above lost ground in June, each continues to be higher than the 50-point threshold that indicates growth in the manufacturing sector.

"Cooling off" is common after sharp expansions
It is important to remember how these surveys are fashioned and how that affects the outcome of the index. PMIs measure growth, not actual levels of new orders, production, etc. Survey participants are asked to compare their current month's levels of new orders and production (among other variables) with the previous month's level. Responses are generally collected in a "better/same/worse" questionnaire format. In most cases for June, including the United States and the Southeast, many participants jumped from indicating "better" conditions, as they had over the past several months, to reporting that conditions were the "same" from May to June. This response resulted in a lower reading of the PMI, which is a common trend early in recovery stages.

ENLARGE

U.S. and Southeast PMIs indicate above-average growth but are coming off of initial recovery highs
Regarding the Institute for Supply Management's (ISM) PMI, Norbert Ore, chair of the ISM Manufacturing Business Survey Committee, said the following:

"We are now 11 months into the manufacturing recovery, and given the robust nature of recent growth, it is not surprising that we would see a slower rate of growth at this time. The sector appears to be solidly entrenched in the recovery. Comments from the respondents remain generally positive, but expectations have been that the second half of the year will not be as strong in terms of the rate of growth, and June appears to validate that forecast."

Chris Williamson, chief economist at Markit, cites stimulus-driven growth contributing to the second quarter peak and hints that challenges remain for manufacturing:

"The second quarter most likely represents a peaking in the rate of expansion of manufacturing output, as growth slows in coming months as stimulus-driven tailwinds are replaced by mounting headwinds."

On a more local level, Kennesaw State University (KSU), primary producer of the Southeast's PMI, said declines in the Southeast PMI for May and June likely are adjustments to April's unusually high levels of new orders and production.

ISM and KSU reports additionally conclude that U.S. and Southeast production growth measures are still above the global average in June.

So June's PMI data should not be a cause for concern. Further deceleration of purchasing managers indices, however, could signal bad news for not just manufacturing sectors, but the overall economies they represent.

By Mark Carter, an economic analyst in the Atlanta Fed’s research department