Key Takeaways:
US factory goods orders declined in May as commercial aircraft bookings slumped, though demand for non-aircraft goods held up on AI-related capital spending.
US factory orders fell in May as a decline in commercial aircraft bookings outweighed resilient demand elsewhere, while a separate survey showed factory activity expanded at a slower pace in June. The Institute for Supply Management's manufacturing PMI slipped to 53.3 last month from 54.0 in May, missing the consensus estimate of 54.0, according to data released Wednesday.
"The headline decline in factory orders reflects volatility in the aircraft category, but the underlying trend in non-aircraft capital goods remains supported by AI-related investment," a Commerce Department official said. The data showed that bookings for commercial aircraft weakened during the month, a category that often swings sharply from month to month. Excluding transportation equipment, orders held up better, driven by investment in artificial intelligence infrastructure and equipment.
The ISM's June reading, while lower than expected, remained above the 50 threshold that separates expansion from contraction for the seventh consecutive month. The prices-paid subindex stayed elevated, indicating that producer-level inflation pressures persist within the manufacturing sector. The May factory orders data and the June ISM survey together paint a picture of an industrial economy that is still growing but losing momentum, with the composition of demand shifting toward technology-related capital spending and away from traditional manufacturing categories.
The market reaction to the data was muted. The US dollar edged slightly lower against major peers, while Treasury bonds and gold saw modest support as traders interpreted the softer readings as reducing the urgency for further Federal Reserve tightening. The two-speed nature of the data — weaker aircraft orders alongside resilient AI-driven investment — suggests the manufacturing slowdown is concentrated in specific sectors rather than broad-based.
What the data means for the Fed
The mixed signals from factory orders and the ISM survey give the Federal Reserve little reason to adjust rates at its next meeting. The economy continues to expand, but the cooling in manufacturing adds to evidence that growth is moderating from the pace seen earlier this year. Markets are pricing a high probability that the Fed holds its benchmark rate steady at the July 29-30 meeting, according to fed funds futures.
The persistence of elevated producer prices within the ISM data, however, keeps inflation risks on the radar. The prices-paid index remained at a level historically associated with upward pressure on consumer prices, meaning the Fed's path to rate cuts remains contingent on further disinflation in the goods sector.
A global manufacturing divergence
The US slowdown contrasts with trends in other major economies. Canadian factory costs hit a four-year high in June as US tariffs and supply-chain disruptions pushed up input prices, according to separate data. That divergence highlights how trade policy and geopolitical factors are creating uneven cost pressures across North American supply chains, with Canadian manufacturers bearing the brunt of tariff-related inflation while US factories contend with moderating demand growth.
This article is for informational purposes only and does not constitute investment advice.
