Report On Business® Roundup: May Manufacturing PMI®
The Manufacturing ISM® Report On Business® for May could have channeled “Sesame Street” nostalgia and stated that the data and comments were brought to you by the letter “S.”
Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® Manufacturing Business Survey Committee, told a conference call of reporters on Monday, “The best way to describe the month was sluggish, stable, stagnant, stalled and stuck,” repeating a saying he sometimes heard on the factory floor when orders weren’t exactly rolling in.
The report wasn’t a disaster by any means, though the composite PMI® reading of 48.7 percent indicated contraction for a second straight month, extinguishing hope that March’s expansion was the start of a growth cycle. If this is a bump in the road on the way to a recovery, things won’t smooth out until demand picks up and companies have clarity on monetary policy by the U.S. Federal Reserve (Fed).
The former has been a front-and-center issue for some time. The latter sentiment strengthened in May, as Fiore said companies are hesitant to invest in orders, inventories and capital expenditures until there is relief, or at least certainty, on interest rates. Geopolitical tensions around the globe and the U.S. presidential campaign add to such hesitancy, he added.
“Five months into the year, the lack of a benefit from a rate cut has become a headwind,” Fiore said. “A monetary easing has not occurred, and our panelists’ companies and their customers are reluctant to make any kind of commitments until they see some kind of action.”
A look at ISM manufacturing numbers on a month to month basis. The rise in employment component looks out of place - but is a positive. pic.twitter.com/T0LudIuIT3
— Kathy Jones (@KathyJones) June 3, 2024
Fiore cited data from ISM’s Semiannual Economic Forecast from December, in which manufacturing survey respondents projected an 11.9-percent increase in capital expenditures across the sector this year. In May, that figure dropped to 1 percent.
Much of the data elicited another S-word: sobering. The New Orders Index fell to 45.4 percent, its lowest level since May 2023 (42.9 percent). The Production Index (50.2 percent) has indicated resiliency amid slow demand, in big part because companies worked off order backlogs from coronavirus pandemic over-ordering. That well is drying, with the Backlog of Orders Index at 42.4 percent.
“There has likely been a plateau,” Fiore said. “I don’t see a decline yet, but with new orders slow and customers holding their order books close to the vest, if that continues, there’s not a lot of collective backlog left. At some point, that production number will have to go down, and that means a revenue decline, which leads to other factors that we’re hoping not to see.”
The Employment Index returned to expansion at 51.1 percent, ending a seven-month stay in contraction territory and the highest reading since August 2022 (54.4 percent). However, hiring remains “cautious,” Fiore said, adding that for every respondent comment on adding staff, there was one on reducing head count.
“There might have been a seasonal factor at play, with people graduating college and starting jobs,” Fiore said. “In this environment, 51 percent doesn’t feel much different than 48 percent. Given the uncertain demand, there isn’t any significant hiring activity.”
The Prices Index registered 57 percent, down 3.9 percentage points compared to April. Which commodities like fuel, natural gas, aluminum and plastics remain inflationary pressures, Fiore noted Semiannual Economic Forecast sentiment in May suggesting that manufacturing companies have already absorbed most of their projected price increases for the year.
The Inventories Index was down 0.3 percentage point to 47.9 percent, and sentiment was likely summed up in a comment from a Business Survey Committee respondent in Computer & Electronic Products: “Orders have started to rebound, but inventory levels remain high enough for no impact on our supplier orders. It will take a few more strong months before supplier orders (pick up).”
The forward-looking orders - inventories (blue) in the US manufacturing ISM just went negative for the first time since May 2023. The sharp drop in orders - inventories parallels the fall in early 2022 following Russia's invasion of Ukraine. No recession then. No recession now... pic.twitter.com/kgA6F4T8BI
— Robin Brooks (@robin_j_brooks) June 3, 2024
At the start of this year, a lowering of interest rates was expected to provide a boost to a manufacturing recovery.
However, as that wait continues, so does the sector’s state of inertia: “Without some kind of movement from the Fed on the monetary side, we’re probably sitting where we’re going to sit for some time,” Fiore said.
The Report On Business® roundup:
Bloomberg: U.S. Factory Activity Contracts as Orders Slide, Output Weakens. “The figures indicate U.S. manufacturing is struggling to gain momentum due to high borrowing costs, restrained business investment in equipment and softer consumer spending. At the same time, producers are battling elevated input costs. … One hopeful sign for domestic producers was a gauge of export demand grew for the third time in the last four months. Another was a pickup in factory employment.”
CNBC: ISM Manufacturing Index Lower than Expected in May. “If we look at (the Prices Index), last month at 60.9 percent, the highest in nearly two years, it has backed off a bit, down to 57 percent,” analyst Rick Santelli said. “(The index) hasn’t been below 50 percent since December, and less inflation may be a good thing.”
Mace News: Manufacturing in Contraction for Second Straight Month as New Orders Plunge Void of Fed Rate Cut Relief. “Asked whether an interest rate cut by the Federal Reserve in September, as expected by markets, could trigger an unwanted surge in capital investment from the viewpoint of guiding inflation lower, Fiore replied that it is unlikely to explode but said, ‘I would expect a positive move in new orders.’ ”
MarketWatch: ‘The Manufacturing Side of the Economy Appears to Have Stalled,’ ISM Says. “The industrial side of the economy is unlikely to generate sustained growth until interest rates fall and a lower cost of borrowing entices customers to buy more goods or invest. … At the same time, higher prices of raw materials such as oil, plastics, copper and aluminum are putting upward pressure on prices. That could keep inflation elevated.”
CAPITAL ECON: ".. The drop in the #ISM manufacturing index in May adds to the sense that the economy is losing momentum .. driven by the new orders index falling to a 12-month low. .. The fall in the prices paid index to 57.0, from 60.9 will also be good news for the Fed, taking…
— Carl Quintanilla (@carlquintanilla) June 3, 2024
Reuters: U.S. Factory Activity, Construction Spending Both Fall. “With interest rates remaining high thanks to the Federal Reserve's focus on elevated inflation, spending on manufactured products and capital projects has been sluggish. … Details of the ISM survey and comments from respondents ‘suggest that higher-than-expected rates this year have reduced business investment and have made businesses more reticent to increase their levels of inventory,’ Matthew Martin, U.S. economist at Oxford Economics, said in a research note.”
ISM’s Services PMI® will be unveiled on Wednesday, and the Hospital PMI® on Friday. For the most up-to-date content on the reports under the ISM® Report On Business® umbrella, use #ISMPMI on X, formerly known as Twitter.
(Photo credit: Getty Images/Kali9)