US manufacturing expansion slowed in June. Cost index saw the largest drop in almost four years.

Manufacturing activity in the United States continued to expand for the sixth consecutive month in June, supported by capital expenditure, investments in artificial intelligence (AI), and defense demand. However, despite some relief in rising material costs, businesses remain cautious about the outlook, and manufacturing employment has not shown significant improvement. Data released by the Institute for Supply Management (ISM) on Wednesday showed that the U.S. manufacturing index dropped 0.7 points to 53.3 in June, but remained close to a four-year high. A reading above 50 indicates expansion in manufacturing activity, while below 50 represents contraction. The latest data indicates that the U.S. manufacturing sector is experiencing its longest expansion since 2022. In terms of costs, the rate of increase in raw material prices slowed noticeably in June. The ISM price index fell sharply by 9.1 points to 73, marking the largest monthly decline since July 2022. The temporary agreement reached between the U.S. and Iran helped push international oil prices significantly lower, easing input cost pressures for manufacturers. However, the price index remains significantly higher than at the beginning of the year, indicating that cost pressures in manufacturing have not completely subsided. On the demand side, the pace of new orders has slowed, but overall remains robust; the ISM production index dropped to a six-month low, suggesting a slight cooling of growth momentum in factory output. By industry, 14 manufacturing sectors saw growth in June, including printing, electrical equipment, and textiles. In contrast, three industries - paper products, furniture, and wood products - experienced contraction. Recently, the U.S. manufacturing sector has been supported by various factors. Capital investments related to AI infrastructure continue to grow, driving demand for equipment and components; defense-related spending also provides support for manufacturing. Additionally, supply chain uncertainties arising from conflicts in the Middle East have prompted some businesses to increase inventory early, supporting order demand in the short term. Nevertheless, business feedback remains predominantly negative. Susan Spence, Chair of the ISM Manufacturing Survey Committee, stated that in June's survey responses, 34% were positive, while 66% were negative, indicating that manufacturers remain cautious about costs, supply chains, and demand prospects. In terms of employment, the expansion in manufacturing has not yet translated into the labor market. The ISM employment index rose to 49.7 in June, the highest level since January 2025, but still below 50, indicating that manufacturing employment is still contracting. Markets will focus on the U.S. monthly employment report released on Thursday to further assess the overall labor market situation. Furthermore, the backlog of orders in June grew at the slowest pace this year, while the supplier delivery index continued to show extended delivery times. Analysts believe that risks of supply chain disruptions and concerns about further price increases in the future may prompt some manufacturers to continue increasing raw material inventories. The ISM inventory index rose to its highest level in over a year, indicating that businesses are still replenishing stocks to deal with potential supply uncertainties. Overall, U.S. manufacturing expanded in June, with some relief in cost pressures, but with slowing momentum in new orders and production capacity, coupled with ongoing employment contraction, indicating that the industry's recovery foundation remains unstable.