Manufacturing activity contracted in June, according to the Institute for Supply Management’s manufacturing index. For the first time since July 2009, the ISM Index slipped under 50, dropping to 49.7 last month. A reading below 50 indicates a contracting manufacturing sector.

Is this an early warning of a new recession? Perhaps, but we’re still a long way from declaring the current growth phase of the business cycle dead. Like any one economic indicator, the ISM Index is far from flawless when it comes to using it as a benchmark for anticipating major turning points in the economy. To be precise, a below-50 reading for this indicator doesn’t always correspond with recession. The history of this index is littered with periods when below-50 levels didn’t equate with a new downturn in the broad economy.
Then again, it’s also clear that every recession in the post-World War II era has been accompanied by sub-50 readings in the ISM index. Sometimes a dip is relevant, sometimes not. It’s too soon to say if today’s today is an early warning or another false signal. Nonetheless, it’s hard to overlook the latest reading for new orders, which tumbled sharply last month relative to May. On the other hand, manufacturing employment is holding steady.

What we know for sure is that the key economic indicators for May—the most recent full set of monthly numbers published so far—are trending positive. Fourteen crucial leading and coincident indicators through May tell us that recession risk was quite low (for an overview of these indicators, see this post).

Will June tell us differently? Today’s ISM report certainly implies that incoming data will be weaker relative to May. But forecasting and reading the numbers in hand are two different tasks. For the moment, growth rolls on, based on a broad set of numbers. We may suffer an attitude adjustment in the weeks ahead, but for now a darker future is still the stuff of speculation.
“Clearly [today’s ISM report] is the biggest sign yet that the U.S. is catching the slowdown that is well underway in Europe and China,” writes Paul Dales, senior U.S. economist at Capital Economics, in a note to clients, according to MarketWatch. “But it is worth remembering that a reading of below 47.0 is required to be consistent with another recession. This means the index is still consistent with a growing economy, albeit at an annualized rate of a little below 1%.”
If June proves to be a turning point for bigger problems, we may find stronger evidence in the government’s employment report scheduled for release this Friday (June 6). At the moment, the consensus forecast still calls modest improvement for June vs. May. Private-sector jobs are expected to rise by a net 105,000, up from May’s sluggish 82,000 gain, according to Briefing.com.
One reason to think optimistically is today’s encouraging news on employment growth last month in small businesses via the Intuit Small Business Employment Index. According to a press release,

The employment index shows that employment increased by 0.3 percent in June, for an annualized rate of 4.1 percent — the strongest rate of growth that small businesses have seen in the past three months. This equates to approximately 70,000 new jobs created, although Intuit is recalibrating the index and expects these numbers to change.

Let’s see if the broad national report on employment confirms the trend… or not.