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The US manufacturing sector is facing challenging times, according to two key reports released on Monday. The Institute for Supply Management (ISM) and S&P Global published their manufacturing Purchasing Managers Index (PMI) reports for June, both indicating a faster contraction in manufacturing activity compared to May.

Timothy Fiore, chair of the ISM’s manufacturing business survey committee, expressed concerns about weak demand, slowing production due to insufficient work, and capacity issues among suppliers. He also noted that there were signs of further employment reductions in the near future.

The ISM PMI dropped to 46 in June from 46.9 in May, while S&P Global’s PMI registered a reading of 46.3, down from 48.4 in May. Readings below 50 in both indexes signify contraction in the sector, while readings above 50 indicate expansion.

These reports arrived after the final week of June witnessed several positive economic data points, including GDP, housing data, and consumer confidence, which suggested a potential turnaround in the US economy. Previously, there had been concerns about an imminent recession, but consensus views have shifted towards a delayed downturn.

It might seem like a fitting time to criticize Wall Street forecasters and the media that follows them, considering the disparity in economic outlooks. However, the Census Bureau’s May report on construction spending, released on the same day, revealed that US manufacturing construction spending reached a new record high in May.

This record-setting spending can be attributed largely to investments in chip fabrication facilities and electric vehicle plants. It indicates that domestic companies are not only discussing the prospects of the US manufacturing base but also actively investing in it.

A noteworthy observation made by Wells Fargo in response to the ISM report highlights the nuance within the data. While the ISM indicates a correction in the sector, other manufacturing data suggest recent signs of increased activity. The purchasing manager index is calculated as a diffusion, reflecting the breadth of change in activity throughout the sector, rather than actual production levels.

Examining the sub-indexes in the ISM report reveals that for all 10 categories, the most common response was that conditions remained the “same” as the previous month or were “about right.” This means that the headline figure, which depicts the worst reading for manufacturing activity in three years, largely comprises respondents who stated that conditions had either not worsened or had actually improved. The bleak outlook arises primarily due to the index’s focus on the difference between two extremes.

While the narrative surrounding markets and the economy is always influenced by marginal changes, it’s important to note that the majority of consumer and business spending is already predetermined, often extending years into the future. The real surprises stem from even the slightest alterations made by these actors in response to short-term events.

It is essential to recognize that not all surprises invalidate previous assumptions. Sometimes, surprises are merely unexpected outcomes that challenge prevailing expectations without negating the overall narrative.