Jefferies Asserts Manufacturing Remains Trapped in Recessionary Challenges

**Title: Is a Soft Landing Possible? Experts Weigh In on the State of the Economy**

**Subtitle: Wall Street Optimistic despite Signs of Weakness in Manufacturing Sector**

As the first-quarter U.S. GDP growth was revised up last week, Wall Street strategists and economists have been issuing bullish predictions for the American economy. Recent surveys conducted among small businesses also indicate that the backbone of the economy remains strong. Many experts now believe that a “soft landing” scenario, where inflation cools without triggering a recession, is not only possible but likely. Even Federal Reserve Chairman Jerome Powell has expressed that a recession is no longer the most likely outcome for the American economy. This positive outlook comes after Powell’s staff predicted a “mild recession” in April. However, despite this optimism, there are signs of weakness in the manufacturing sector.

Challenges in the Manufacturing Sector

The ISM Manufacturing Purchasing Managers’ Index (PMI), which gauges the health of the manufacturing sector by measuring managers’ new orders, inventory levels, production, supplier deliveries, and employment, fell to 46 last month from 47.1 in May. This is the lowest reading since May 2020. A reading below 50 indicates contraction in the sector, marking the eighth consecutive month of decline after a 29-month period of expansion. Jefferies economist Thomas Simons noted that the data suggests that the manufacturing sector is still caught in a recession.

Weak Demand and Backlogs

In June, only the transportation equipment industry managed to see growth, while new order demand remained weak. The drop in the new export orders index from 50 in May to 47.1 in June further illustrates this decline. The backlogs index, which measures orders received but not yet started by manufacturers, also came in weaker than expected at 38.7, just above the lowest reading since February 2009. Simons suggests that the lack of new demand has caused businesses to focus on working through back orders, ultimately leading to further disinflation and job cuts within the manufacturing sector.

Prices Paid and Employment Contraction

The Prices Paid index, which measures average prices paid by manufacturers, sank to 41.8 in June from 44.2 in May. This decline indicates a decrease in manufacturing costs. Additionally, the employment index dropped to 48.1 from 51.4, signaling contraction in manufacturing jobs. Supplier deliveries also fell for the ninth consecutive month in June. Simons argues that this decline is not just a sign of improving supply-chain problems, but also an indication of weak demand for capital equipment and manufactured goods.

Manufacturing Sector’s Impact on the Economy

According to Jeffrey Roach, LPL Financial’s chief economist, the manufacturing sector’s role in the U.S. economy has diminished over time. However, he believes that the ISM data remains a reliable real-time indicator of corporate sentiment. The latest data shows that activity in the manufacturing sector has stagnated. Despite the slowdown, Roach argues that this may not necessarily be bad news for the Federal Reserve. The decline in economic activity is expected to ease some inflationary pressures, alleviating concerns for the risks of persistent inflation.

Conclusion

While the recent data from the manufacturing sector raises some concerns, many experts still remain optimistic about the overall state of the American economy. The positive GDP growth revision, along with the resilience of small businesses, indicates that a soft landing scenario is likely. The Federal Reserve may find some relief with the slowdown in economic activity, which could help mitigate inflationary pressures. As the economy continues to evolve, it will be crucial to closely monitor both the manufacturing sector and the broader economic indicators to get a comprehensive view of the country’s economic health.