The Institute for Supply Management (ISM) just came out with its Manufacturing Purchasing Managers’ Index (PMI) for May. It reflects a drop to 48.5. This reading, a decline from 48.7 in April, represents a deepening contraction and a major miss versus analysts’ consensus expectations of 49.5. US manufacturing activity fell further into contraction territory. This worrying trend is bringing new fears about the sector’s health following a series of economic shocks over the last few years.
In May, even the manufacturing sector’s performance paints a picture of the slowdown that’s sunk in since February, when activity barely grew at all. This is corroborated by the latest PMI figures showing a contraction in demand and output indexes, as well as a deterioration of inputs. This data underscores the difficulties that manufacturers are currently experiencing, especially with renewed trade headwinds preventing the promising signs of recovery from taking hold.
Declining Manufacturing Activity
The ISM Manufacturing PMI plummeted to 48.5. That means the nation’s manufacturing sector is contracting for the third month in a row. A number below 50 indicates that there are more respondents measuring a contraction in activity than an increase.
After barely expanding in February, in May US manufacturing activity moved deeper into contraction. This is reflected by most indexes of demand and production that are in contraction and have decelerated. At the same time, leading (input) metrics have begun to soften.
New Orders index marginally improved to 47.6, an increase from April’s 47.2 according to the May report. That’s still short of the neutral benchmark of 50. Unfortunately, this growth is not nearly enough to counteract the widespread contraction we’re seeing along almost every other advanced key index.
Employment and Prices Trends
Interestingly, even with the overall economic slump, the Employment Index did tick up slightly to 46.8 from 46.5 in April. Sector payrolls are growing even faster than we first noted. This positive news indicates a degree of tenacity in the labor market overall, despite continued turmoil within the larger manufacturing sector. Even so, despite the spike, the Employment Index remains in contraction territory, pointing to continued instability between hires and layoffs in the industry.
The Prices Paid Index fell a bit from 69.8 to 69.4. Either way, this change is a welcome signal of continued input costs easing for manufacturers. This implementation will bring welcome relief to businesses that have been faced with rising costs. At the same time, it stresses the continuing inflationary pressures that manufacturers continue to wrestle with.
Economic Implications
With the longest continuous manufacturing contraction on record, fears over its negative effects on the overall economy come to the forefront. We’ll be looking at that quarterly GDP comparison for 2Q 2023 over 1Q 2023 very closely. Annualized quarterly GDP numbers are often used to make big predictions about GDP, but those projections obscure some important details about growth rates.
Following the unexpectedly poor PMI data release, USD was knocked lower out of the gates on Monday. With a notable bearish trend, it returned to the sub-98.00 territory. Analysts blame increasing trade tensions and the softening of the manufacturing sector for what’s causing this currency depreciation.
Meanwhile, key economic indicators are sending warning signs of a downturn. Stakeholders in the manufacturing sector need to remain proactive and flexible to navigate an environment in constant flux. That long-running contraction combined with escalating worries on multiple trade fronts could mean a perfect storm of trouble lurking ahead.