The Institute for Supply Management’s Manufacturing PMI came in at 53.3 for June, down 0.7 percentage points from May and below analysts’ expectations. Despite the decline, it was still the second-highest reading of the year and remains consistent with roughly 2% real GDP growth.
Any PMI reading above 50 signals expansion in the manufacturing sector, while a reading below 50 indicates contraction. ISM has also noted that a sustained reading above 47.5 generally points to growth in the broader U.S. economy.
New orders, one of the closely watched indicators of future manufacturing activity, also expanded for the sixth consecutive month. The new orders index came in at 56, down 0.8 points from May.
Among the six largest manufacturing industries tracked by ISM, four reported growth in new orders: computer and electronic products, machinery, transportation equipment and chemical products.
Susan Spence, chair of the ISM Manufacturing Business Survey Committee, said demand sentiment remained positive in June, with positive comments outnumbering negative comments by roughly 2.7 to 1.
Manufacturing strength could support LTL freight
The continued improvement in manufacturing could be an encouraging sign for the less-than-truckload market.
Industrial production plays a major role in LTL freight, with roughly two-thirds of LTL carrier revenue connected to industrial activity. Historically, changes in ISM manufacturing data can show up in LTL tonnage several months later.
A new orders reading around 51.9 or higher over an extended period has typically been associated with growth in the Census Bureau’s manufacturing orders data. June’s reading of 56 remains comfortably above that level.
Recent updates from publicly traded LTL carriers have also pointed to improving freight conditions.
Two-year comparisons turned positive for the group in May after a lengthy freight downturn. Carriers have cited improving manufacturing demand along with freight returning from the truckload sector as factors helping volumes recover.
The market still has plenty of unused capacity. Many public LTL carriers are estimated to have roughly 30% excess door capacity, but pricing has remained disciplined.
Contractual rates continue to increase by an average mid-single-digit percentage, while carriers have also been implementing general rate increases more frequently.
ArcBest recently implemented a 5.9% general rate increase at ABF Freight. The increase took effect June 22, approximately six weeks earlier than the already shortened rate-increase cycle that has become more common throughout the LTL industry.
ArcBest also raised its second-quarter outlook, citing stronger pricing initiatives and cost reductions.
Other major LTL carriers have reported improving trends as well, including XPO, Old Dominion Freight Line and Saia.
Transportation capacity remains tight
The June ISM report also showed continued signs of transportation and supply chain tightness.
The supplier deliveries index came in at 57.4, down 3.2 points from May. A reading above 50 indicates slower supplier deliveries, meaning manufacturers continued to experience longer delivery times and potential supply chain constraints.
June marked the seventh consecutive month of slower supplier deliveries.
Customer inventories remained low, falling 0.4 points to 42.3. Low inventory levels can be supportive of future manufacturing activity because customers may eventually need to rebuild stock.
Production remained in expansion territory for the eighth consecutive month, coming in at 52.2. However, that was down 2.1 points from May.
Manufacturing employment remained slightly contractionary at 49.7, although the index improved 1.1 points from the previous month.
Manufacturers have increasingly relied on automation and robotics to increase output without significantly expanding payrolls. Still, ISM said 64% of respondents reported actively hiring, while 36% said they were managing existing head counts.
That represents a noticeable shift from January, when 66% of respondents said they were focused on maintaining current staffing levels.
Many manufacturers appear to be waiting for stronger and more consistent demand before making larger hiring commitments.
Trade uncertainty, tariffs and geopolitical tensions are also making companies more cautious when it comes to expanding payrolls and capital spending.
Backlogs barely remain in expansion
The order backlog index came in at 50.5, just above the level signaling expansion and down 1.7 points from May.
Prices paid remained highly inflationary at 73, although the index dropped sharply by 9.1 points from the previous month.
Overall sentiment among manufacturers remained cautious.
According to ISM, approximately 34% of respondent comments in June were positive, while 66% were negative.
Manufacturers frequently pointed to geopolitical tensions in the Middle East, rising raw material costs, higher interest rates, tariffs and uncertainty surrounding global trade as major concerns.
Pricing volatility was another major issue.
ISM said half of respondents mentioned pricing volatility as a concern for their businesses. Among negative comments, the Iran conflict was mentioned in 31%, while tariffs were mentioned in 17%.
Despite those concerns, improving manufacturing activity continues to provide a potentially positive signal for freight demand, particularly for LTL carriers heavily exposed to the industrial economy.
LTL stocks were trading roughly 1% to 2% higher Wednesday afternoon, outperforming the S&P 500, which was up about 0.3%.