By Xavier Fontdegloria

Activity in the U.S. manufacturing sector grew in June at its slowest pace in two years dragged by a decline in new orders, a sign of weaker demand ahead for goods amid high inflation.

The Institute for Supply Management said Friday that its index of manufacturing activity fell to 53.0 in June from 56.1 in May, the lowest reading since June 2020. The index, which is based on a poll among manufacturers across the U.S., signals that activity in the sector expanded over the month as it is above the 50.0 point threshold that indicates growth.

Economists polled by The Wall Street Journal expected the index to fall to 54.3.

The decline in the index was driven by drops in new orders and employment. However, companies improved their progress on addressing moderate-term labor shortages and sentiment remained optimistic regarding demand, said Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee.

The U.S. factory sector has been resilient due to red-hot demand for goods during the Covid-19 pandemic. However, supply-chain disruptions, labor shortages, high prices and a shift in consumer spending toward services pose risks in the months ahead.

In June there were increasing signs of weakening demand for goods, according to the survey. The forward-looking new orders index fell to 49.2 from 55.1, signaling a slight contraction in orders for the first time in two years.

"New orders have stabilized and not increased," one respondent from the chemical products sector said.

The production index increased slightly to 54.9 from 54.2, reflecting a continued increase in manufacturing output over the month.

The employment index decreased to 47.3 from 49.6, indicating that goods producers didn't expand their workforce. Despite the contraction, firms reported lower rates of quits compared with May, Mr. Fiore said.

June's ISM data provided signs of relief from the supply-chain bottlenecks that have weighed on the factory sector for months.

The supplier deliveries index fell to 57.3 from 65.7. "The index continues to reflect suppliers' difficulties in meeting demand, but there are clear signs of easing," the report said. Transportation networks improved compared with May, it said.

Inflation pressures remained elevated, but eased for third consecutive month, with the prices index falling to 78.5 from 82.2. "Notably, 8.3% of respondents reported lower prices in June, supporting a continued slow but steady move toward price softening," Mr. Fiore said.

Write to Xavier Fontdegloria at xavier.fontdegloria@wsj.com

(END) Dow Jones Newswires

July 01, 2022 10:43 ET (14:43 GMT)

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