Manufacturing Shows Promise For Third Straight Month in May, Says ISM

Manufacturing growth remained intact for the third straight month in May, based on data featured in the May edition of the Manufacturing Report on Business from the Institute for Supply Management (ISM).

The PMI, the index used by the ISM to measure growth, was 51.3 (a reading of 50 or higher indicates growth) in May, representing a 0.5 percent gain over April. From October through February, the PMI had seen sub-50 readings, with October marking the first month that the PMI was below 50 since November 2012. May's PMI is 1.0 percent above the 12-month average of 50.3. ISM noted the over all economy has seen growth for 84 consecutive months.

The PMI was the lone metric of the four key ones in the report to see growth. New orders, which are often cited as the engine that drives manufacturing, were off 0.1 percent at 55.7, showing that orders have been growing strong over the last five months. Production fell 1.6 percent to 52.6 but showed growth for the fifth month in a row, and employment was flat at 49.2 and has contracted for the last six months.

ISM said that of the 18 manufacturing sectors contributing to the report, 12 reported growth in April, including Wood Products; Textile Mills; Printing & Related Support Activities; Fabricated Metal Products; Paper Products; Plastics & Rubber Products; Computer & Electronic Products; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; Food, Beverage & Tobacco Products; Machinery; and Primary Metals.

ISM member respondents cited in this month's report were largely positive. A transportation equipment respondent said business is still good but slowing, and a machinery respondent said business is still good but slowing. A petroleum and coal products respondent commented that oil and gas continues to struggle to meet cost controls required in the new low-oil price environment.

Brad Holcomb, chair of the ISM Manufacturing Survey Business Committee, said in an interview that the over all growth seen in manufacturing over the last three months is encouraging, on the heels of a long stretch of declines and trending in the wrong direction.

“There is a lot to like about this, and it starts with new orders,” he said. “While they are down slightly from April, they are still essentially even over all. Production is also following suite, according to assets and inventory on hand, along with backlog of orders (down 3.5 percent to 47.0) but not viewed as a concern.”

Looking at the flat employment numbers, Holcomb said it is not likely to grow this year, based on data issued in the ISMs Semiannual Economic Forecast in May, but he noted that employment baseline levels are in a strong place now. And until there is more of a robust growth scenario he said that employment remains solid for now.

May supplier deliveries at 54.1 (above 50 indicates slower deliveries) slowed at a faster rate in May, with a 5.0 percent uptick compared to April.

“What this means is that the supply chain is tightening,” explained Holcomb. “This is reflected in May inventories at 45 (down 0.5 percent from April). That combination indicates that things are tightening up and is a good thing. As for the low inventories, credit goes to inventory supply managers for keeping inventories in check to this point, but I think those days are numbered, where it needs to starts to grow, assuming new orders continue to head up. It is a huge factor; there is a lot of money tied up in inventories. Supplier deliveries slowed down, and we don't want to run out of specific inventories as new orders come along.”

IHS Global Insight U.S. Economist Michael Montgomery was not enthused by May's ISM report.

“[A]lmost every PMI in the major manufacturing powerhouses is between 48 and 52,” he said in a research note. “Anything that close to 50 is so close that no one can tell the difference. The whole world is effectively stalled because global demand growth is weak. The U.S. suffers at a short-term disadvantage because of the legacy of a strong dollar up until just a few months ago, and will continue to face dollar-drag for the rest of 2016. With no engine of growth in world demand, losing exports to foreign competitors, and losing domestic market share to overseas suppliers, the moderate goods demand growth in the U.S. is eaten away by drag. The manufacturing malaise continues with nothing but periodic spikes in one reading or another to disturb its torpor.”

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