Business conditions in the U.S. manufacturing sector deteriorated more than anticipated in June, marking the third consecutive month of contraction, according to the Institute of Supply Management's Purchasing Managers' Index.

The pace of contraction in June was the fastest in four months, with none of the five subindexes that directly contribute to the overall index in expansion territory, down from two in May.

June ISM Manufacturing PMI Report: Key Highlights

• The ISM Manufacturing PMI Index dropped to 48.5% in June, a 0.2 percentage point decline from May's 48.7%, falling short of the median consensus of 49.1% as gauged by Econoday.
• The New Orders Index rose from 45.4% in May to 49.3% in June, but remained in contraction.
• The Production Index fell from 50.2% to 48.5%.
• The Employment Index eased from 51.1% to 49.3%.
• The Supplier Deliveries slightly increased from 48.9% to 49.8%.
• The Prices Index was 52.1%, marking a reduction of 4.9 percentage points from May's 57%.
• The Backlog of Orders Index extended its contraction from 42.4% to 41.7%.
• New Export Orders entered contraction, down from 50.6% to 48.8%.
• Imports also flipped into contraction, down from 51.1% to 48.5%.

The Economist's Take

"U.S. manufacturing activity continued in contraction at the close of the second quarter. Demand was weak again, output declined, and inputs stayed accommodative," said Timothy Fiore, chair of the Institute for Supply Management.

U.S. manufacturing companies reported that they reduced production levels month-over-month as headcount reductions continued in June.

Inputs, which include supplier deliveries, inventories, prices, and imports, remained favorable for future demand growth.

While the Prices Index decreased, it stayed in expansion territory, albeit at a slower rate for the second consecutive month, indicating some cooling dynamics in price increases.

Only 20% of companies reported price increases in June, down from 26% in May.

Fiore cautioned that high interest rates are dampening the investment outlook in the manufacturing sector, and that production declines could negatively impact firms' cash flows.

"Demand remains subdued, as companies demonstrate an unwillingness to invest in capital and inventory due to current monetary policy and other conditions. Production execution was down compared to the previous month, likely causing revenue declines, putting pressure on profitability," he said.

Market Reactions

U.S. stocks witnessed downward pressure after the release of the ISM's June manufacturing PMI report.

The S&P 500 Index, as tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY) was 0.1% lower at 10:20 a.m. ET.

The Dow Jones Industrial Average, as tracked by the SPDR Dow Jones Industrial Average ETF (NYSE:DIA) gained 0.1% for the day, but slightly trimmed earlier gains.

Tech stocks, as broadly monitored through the Invesco QQQ Trust (NASDAQ:QQQ) fell 0.1%.

Bond yields rose across the board, with the 10-year benchmark yield rallying 6 basis points to 4.56% and the 30-year yield advancing by 7 basis points to 4.63%.

The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) tumbled 1.7%, after closing 1.9% lower last Friday, eyeing the worst 2-day performance since early February, or the second-worst one year to date.

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