Recently, the Institute for Supply Management (ISM), Tempe, Ariz., reported its June Purchasing Managers Index (PMI), based on a survey of approximately 350 of the nation’s supply executives, had fallen below 50 — the number that signals a contraction in the manufacturing sector — for the first time in three years (Table). The index of manufacturing activity fell to 49.7 from 53.5 in May, which marks the lowest reading since July 2009, one month after the recession officially ended. According to the “June 2012 Manufacturing ISM Report On Business,” respondents were divided on their answers. “Comments from the panel range from continued optimism to concern that demand may be softening because of uncertainties in the economies in Europe and China,” wrote Bradley J. Holcomb, chair of the ISM Manufacturing Business Survey Committee and author of the report.

Despite reports of decreased regional manufacturing activity released two weeks previously (see Regional Manufacturing Reports Reveal Mixed Activity), the ISM index fell almost a full point below the lowest forecast for it in a survey of 70 economists conducted by Bloomberg, New York. Predictions in the Bloomberg survey ranged from 50.5 to 53.5, with the median totaling 52. As a result, some industry economists have reacted to the lower-than-expected ISM index number as an indication that U.S. manufacturing is faltering.

For instance, Nigel Gault, the chief U.S. economist for IHS Global Insight, Lexington, Mass., wrote to clients that the report suggests that — for the moment — the manufacturing recovery is “out of steam.” Additionally, according to Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York, “Manufacturing is gearing down.”

RDQ Economics, New York, points out that the drop in new orders in the ISM index is the biggest decline since October 2001 — and the second-largest slide since December 1980. The firm calls it “an event that occurs in roughly one in 100 reports.” The important issue now, RDQ says, is whether this represents “volatility reflecting fears over Europe — the export order index fell six points — and will orders bounce back or is it a slide into something more worrying?” According to RDQ, the uncertainty about the market sector that has been driving the economic recovery “just got ratcheted up a notch with this report.”