–ISM Manufacturing Index 48.7 Vs. 49.2 in April; Median Forecast 49.8
–ISM’s Fiore: ‘People Are Concerned About Recession, Fed Keeping Rates Higher for Longer’
–Fiore: Manufacturing Likely to be ‘Stable’ June to August Without a Rate Cut
–Fiore: A September Rate Cut Would Help Bring in New Orders
By Max Sato
(MaceNews) – U.S. manufacturing activity was in contraction for a second straight month in May after a brief popup into growth territory in March as new orders plunged to the lowest level in 12 months amid uncertainty over when the Federal Reserve will cut interest rates to support demand, data from the Institute for Supply Management released Monday showed.
The sector index compiled by the ISM, which shows general direction, fell 0.5 percentage points to a three-month low of 48.7 in May after falling 1.1 points to 49.2 in April and rising 2.5 points to 50.3 in March. It was weaker than the median economist forecast of 49.8.
“Demand remains elusive as companies demonstrate an unwillingness to invest due to current monetary policy and other conditions,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement. “These investments include supplier order commitments, inventory building and capital expenditures.”
“Production execution continued to expand but was essentially flat compared to the previous month,” he said. “Suppliers continue to have capacity, with lead times improving and shortages not as severe.”
Fiore told reporters that the ISM’s main index is now in a lower range of 47 to 51, down from 49 to 53 seen earlier this year, in the absence of “assurances” of a Fed rate cut.
“Our panelists and their customers are reluctant to make any kind of commitments until they see some kind of action on the rate side,” Fiore said. “People are still concerned about recession, concerned about the Fed keeping rates higher for longer.” This promoted manufacturers to expect capital expenditures to rise just 1.0% in 2024 in the ISM’s latest semiannual survey released last month, down sharply from the 11.9% surge forecast in December, he noted.
The five “s’s” to summarize the current sector climate is: sluggish, stable, stagnant, stalled and stocked, Fiore said, adding, “We are plateaued.”
In response to questions, he said the manufacturing sector is likely to be “stable” without a Fed rate cut during the summer months of June, July, August, when activity slows down seasonally.
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 … to a range of 50 to 53.”
Among the five subindexes that directly factor into the manufacturing PMI, the new orders index slumped 3.7 points to a 12-month low of 45.4 in May (the weakest since 42.9 in May 2023) after falling 2.3 points to 49.1 in April and rebounding 2.2 points to 51.4 in March. The index at 52.5 in January marked its first growth in 17 months.
The production index was in growth territory for three months in a row but dipped 1.1 points to 50.2 in May after slumping 3.3 points to 51.3 in April and jumping 6.2 points to 54.6 in March.
The employment index improved for the third straight month to show growth for the first time in eight months, rising 2.5 points to 51.1 in May after climbing 1.2 points to 48.6 in April. Panelists’ comments in May indicated an increase in staff reductions compared to April. “The approximately 1-to-1 ratio of hiring versus reduction comments is consistent with activity from November 2023 through March,” said Fiore, who had predicted last month that employment was on its way toward expansion in coming months.
But Fiore also warned against reading too much into the latest figure, saying, 51.1 is not much different from 48.6.
The manufacturing inventories index contracted for 16 months in a row. It slipped 0.3 point to 47.9 in May after being unchanged at 48.2 in April.
Among other subindexes, the prices index indicated growth for the fifth month in a row after showing the first increase in nine months in January. The index fell 3.9 points to 57.0 in May after surging 5.1 points in April to 60.9, which was the highest since 78.5 recorded in June 2022.
The customers’ inventories index showed contraction (below 50) for the sixth straight month. It edged up 0.5 point to 48.3 in May, the highest since 50.8 in November 2023, after rising 3.8 points to 47.8 in April.
The backlog orders index stayed below 50, and thus in contraction, for 20 months in a row. It fell 3.0 points to a six-month low of 42.4 after falling 0.9 point to 45.4. It slumped 5.6 points to 37.5 in May 2023, which is the lowest since the Great Recession (33.6 in February 2009).
The new export orders index rose 1.9 points to 50.6 in May after slipping back into contraction in April, when it fell 2.9 points to 48.7. It had surged 6.4 points to 51.6 in February for the highest since 52.6 in July 2022.
The ISM main index had been on a downtrend since it fell 2.7 points to 53.4 in June 2022 but it seems to have hit a bottom in June 2023 at 46.4, the lowest since May 2020, when the index at 43.5 was recovering from a recent low of 41.8 the previous month during the first wave of the pandemic. The pandemic high was 64.0 recorded in March 2021. The all-time low is 29.4 hit in May 1980.
To assess the overall economic climate, the latest ISM survey indicates the overall economy grew for the 49th straight month after one month of contraction in April 2020. The ISM’s manufacturing PMI reading above 42.5, over time, generally indicates an expansion of the U.S. economy. The May survey showed that 55% of manufacturing gross domestic product contracted, up from 34% in April.
The manufacturing sector is in the sixth contracting phase in the past 20 years. Previously, the ISM manufacturing PMI posted contraction just before the pandemic hit the global economy, from August to December 2019, and from March to May 2020. The deepest slump in the past two decades was recorded from September 2008 until July 2009 (the bottom was 34.5 in December 2008) triggered by the U.S. credit crisis.