In the past few weeks, we’ve heard a lot of good news from the U.S. This came in the form of positive jobs data and optimistic comments from Federal Reserve officials. But yesterday, we saw something different, as the country’s manufacturing PMI showed that the industry is contracting.
Amidst forecasts which called for a reading of 50.6, the ISM manufacturing PMI fell to 49.0 from 50.7 in May. Remember, 50 is the dividing line between growth and contraction. A reading above 50 means the industry is expanding while a reading below this means that it is shrinking. This marked the industry’s first contraction in six months and the steepest drop in four years.
According to the data, the reason behind the drop was… well, everyone. It showed that government budget cuts, weak corporate spending, and subdued global demand have all contributed to weakness in the manufacturing industry.
Below are some notable observation made by survey participants from different manufacturing subsectors:
- Computer and Electronic Products: “Government spending has tightened, which has moved out program awards and caused some reduction in force.”
- Fabricated Metal Products: “General economy seems sluggish and pensive. Buyers are not buying much beyond lead times.”
- Electrical Equipment, Appliances & Components: “Market outlook is relatively flat.”
- Machinery: “Downturn in European and Chinese markets is having a negative effect on our business.”
Not surprisingly, the disappointing report was not received well by the markets, who took their frustrations out on the dollar. The American currency posted sharp losses across the board, forcing many dollar pairs to break key levels.
So does this mean we can kiss the Fed’s exit strategy goodbye? Not necessarily, buddy.
U.S. officials are already cautious about the threats stemming from too much quantitative easing (QE). The Federal Advisor Council, for instance, warned that the central bank’s bond purchases are creating bubbles in the fixed income and equity markets. Furthermore, the council determined that it’s not even “clear” if QE has been boosting the economy.
In fact, Ben Bernanke himself admits there are dangers involved in having an overly easy monetary policy. Just last month, he stated that the country’s record low interest rates, if kept for too long, could result in financial instability.
I guess what we should take away from all of this is that based on this report alone, we can’t rule out the possibility that the Fed will wind down its asset purchases soon. But it’s a whole different story if, the upcoming trade balance, ISM non-manufacturing PMI, and employment reports signal deteriorating economic conditions as well.