Manufacturing activity expanded for a sixth consecutive month in June, albeit at a more subdued pace. A survey of manufacturing supply executives returned a 53.3 reading for the recent month, 70 basis points below analysts’ expectations and the May result. The June reading was the second-highest this year and is consistent with 2% real GDP growth, a Wednesday report said.
A reading above 50 for the Institute for Supply Management’s Manufacturing PMI signals expansion, while one below 50 indicates contraction. The group said that when the index sustains a level above 47.5 over time, the overall economy usually grows.
The new orders subindex—an indicator of future activity—was also higher for a sixth straight month at 56. That was 80 bps lower than the May update. Of the six largest industries tracked, four reported an increase in orders (computer and electronic, machinery, transportation equipment and chemical products).
“[New orders] demand sentiment was positive in June, with a 2.7-to-1 ratio of positive to negative comments,” said Susan Spence, chair of the ISM Manufacturing Business Survey Committee.
Latest update supportive of LTL demand
The manufacturing complex has an outsized impact on less-than-truckload volumes. Roughly two-thirds of LTL carrier revenue is tied to industrial output. Inflections in ISM data usually lead LTL tonnage by a few months. A 51.9 reading for new orders (over time) typically signals growth in the Census Bureau’s manufacturing orders dataset.
Intraquarter updates provided by public LTL carriers in early June showed freight demand continued to improve. Two-year-stacked comparisons, which smooth out prior-year volatility, turned positive for the group in May following a prolonged downturn. Improved contributions from the manufacturing sector and the return of some freight that was lost to a depressed truckload market were among the catalysts.
Even with most public LTL carriers holding approximately 30% excess door capacity, pricing remains rational as contractual rates continue to increase by a mid-single-digit percentage on average every quarter. Further, general rate increases are occurring at an accelerated pace.
ArcBest (NASDAQ: ARCB) implemented a 5.9% GRI at its LTL unit, ABF Freight. The June 22 effective date was approximately six weeks ahead of the already truncated 11-month cadence the industry has been following. The company also raised its second-quarter outlook, pointing to pricing initiatives and cost takeouts as the reasons.
- XPO’s Q2 tonnage trending ahead of guidance
- Old Dominion’s May update shows an improving LTL market
- Saia’s tonnage growth accelerates in May on easier comp
Other June ISM takeaways
Tightness across the transportation space could be seen in the ISM’s supplier deliveries subindex. A 57.4 reading (3.2 percentage points lower than May) signaled slower deliveries and potential supply chain constraints for a seventh straight month.
Customers’ inventories remained in the “too low” band, returning a 42.3 reading, down 40 bps sequentially. The current level suggests future production is likely to step higher. Production was positive for an eighth consecutive month at 52.2, but down 2.1 points from May.
Employment (49.7) remained slightly contractionary, but at a slower pace, up 1.1 points from May. The manufacturing complex has been leaning on robots and automation to produce more with less. However, 64% of respondents said they were actively hiring, while only 36% said they were “managing head counts.” The trend was inverse to January, when 66% of panelists said they were holding staffing levels steady.
Most producers want to see sustained signals that demand is firming before hiring. Geopolitical trade headwinds are also an overhang on adding workers, which can be costly to shed when the market moves lower.
The order backlog (50.5) barely maintained expansion, but was down 1.7 points in the month.
Prices (73) were again highly inflationary, but growth cooled 9.1 points from May.
“In June, 34 percent of the comments were positive and 66 percent negative, with a 1-to-1.9 ratio of positive to negative sentiment,” Spence said.
Key complaints from respondents centered on the Middle East conflict, which is driving input and raw material costs higher and also weighing on capex spending decisions. Higher interest rates, tariffs and general trade uncertainty were also cited as concerns.
“Among negative comments, the Iran war was mentioned in 31 percent and tariffs in 17 percent; 50 percent of the panelists mentioned pricing volatility as an issue for their companies.”
Shares of LTL carriers were up 1% to 2% in midday trading on Wednesday compared to the S&P 500, which was up 0.3%.
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