Production output sees mild May decline, with slow growth, reports ISM

May manufacturing activity was essentially flat compared to April while still remaining on the right side of growth, according to the Manufacturing Report on Business issued by the Institute for Supply Management (ISM) today.

The report's key metric, the PMI, fell 0.7% to 52.1 (a reading of 50 or higher indicates growth) in May, following a 2.5% decline from March to April, a 1.1% increase from February to March, and a 2.3% increase from December to January. While an uneven growth pattern remains intact, the index has seen growth for 33 consecutive months, with the over all economy now having grown for 121 consecutive months. The May PMI reading is 4.6% below the 12-month average of 56.7, with May representing the lowest reading during that span.

ISM reported that 13 of 18 manufacturing sectors reported over all growth in May, including: Printing & Related Support Activities; Furniture & Related Products; Plastics & Rubber Products; Textile Mills; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; Computer & Electronic Products; Chemical Products; Food, Beverage & Tobacco Products; Nonmetallic Mineral Products; and Machinery. The six industries reporting contraction in May — listed in order — are: Apparel, Leather & Allied Products; Primary Metals; Petroleum & Coal Products; Wood Products; Paper Products; and Fabricated Metal Products.

The report's key metrics, including the PMI, were mixed in May.

New orders, which are commonly referred to as the engine that drives manufacturing, headed up 1% to 52.7, growing the for the 41st consecutive month coming off of a 5.7% decline in March, with 12 of 18 manufacturing sectors reporting growth.

Production, at 51.3, slipped 1%, following a 3.5% decline in March. This is now the lowest production reading going back to August 2016, when it was at 49.6, while production has grown for 33 consecutive months. Employment headed up 1.3% to 52.4, up for the 32nd consecutive month, with 11 of 18 manufacturing sectors reporting employment growth. Supplier deliveries at 52 (a reading above 50 indicates contraction) slowed at a slower rate for the 39th consecutive month, off 2.6% compared to April. Inventories decreased 2% to 50.9, growing for the 17th consecutive month.

Respondent comments included in the report largely focused on tariffs and trade tension.

A computer & electronic products respondent said that the ongoing tariff issues are impacting costs and influencing supplier realignment on country of origin, adding that the border issue is causing delays in imports from Mexico. And a chemical products respondent said that the threat of additional tariffs has forced a change in the company's supply chain strategy, in that it is shifting business from China to Mexico, which will not increase the number of U.S. jobs.

In an interview, Tim Fiore, Chair of the ISM's Manufacturing Business Survey Committee, explained that the only real positive related to the PMI was that consumption, or production and employment, were relatively stable and strong enough to consume all of the new orders, as well as burn off backlog and replenish customer inventories.

Fiore said the new orders reading of 52.7 was fairly low but still fine, while customer inventories went up 1.1% to 43.7 for its highest reading since April 2018's 44.3.

“Customer inventories reflect future demand, and that pool is pretty much filled, as it usually is when it hits 46 or 47,” he said. New export orders were pretty sluggish on top of that at 51 [up 1.5%] so nothing broke there. There are currency headwinds now, and it is hard to compete overseas, and new export orders are not expanding, which is not a demand element. Production was able to burn off backlog, which is now in contraction mode at 47.2 [down 6.7%]. Over all, demand is softening, with respect to production output.”

On the production and consumption side, Fiore said the general outlook was pretty stable, with continued factory maintenance turnaround and unplanned events cited by ISM members, which carried over from April into May, which he said was not a big surprise. And he noted it is likely factories saw an opening to do long-delayed scheduled maintenance and took it in April and May and supports the issue of demand not being all that strong or at a level that it was in the first quarter plus one.

“It is not expanding or growing that requires hiring a lot more people and puts a lot more stress on the supply chain,” he said. “The sentiment was 3:1 positive, but that was more around having a good book of business that will keep things active from the summer into the fall, with things being good and not a matter of not keeping up. And on the input side, suppliers are delivering faster and supplier deliveries are no longer really an issue. But the inventory number did not grow, so production must have consumed some of that inventory to not only burn off the new orders but also burn down some of the backlog. It is also about managing inventory levels, which is a Q2 issue and also an issue you definitely want to take steps ahead of time so you are stuck with a bunch of inventory, as demand kind of goes away. All in all, this is a stable business environment, growing slowly to a 1.5 kind of GDP.”

Addressing trade as it relates to manufacturing, this report was compiled prior to the development last week regarding the United States' plans to levy tariffs on Mexican goods coming into the U.S., effective June 10 at 5% and rising to 25% by October 10.

Looking back 14 months ago, Fiore said there were tariffs placed on solar panels and washing machines, whereas now there is the potential for tariffs on $1 trillion worth of imported products, representing $250 billion of money that gets extracted out of the economy.

“We sure do have headwinds,” he said. “Given the sluggish growth in May and the fact that the tariff issue now is much worse than what it was going into May, we are going to have a hard time maintaining any kind of growth on that end from here.”

SC
MR