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First Cut: ISM Manufacturing Index remained modestly expansionary in May

The ISM Manufacturing Index dipped to 52.1 in May from 52.8 in April. For a second month in a row, the level hovered in the low 50’s and was consistent with readings not seen since the third quarter 2016. While conditions in the factory sector remained modestly expansionary, overall the index components pointed to lackluster conditions and little upward momentum. Comments from survey respondents indicate that the recent round of tariffs on Chinese goods have added challenges to supply chains and business planning along with expected higher costs. Some are sounding less optimistic about the potential for a rebound in activity over the medium term.

The index for May was close on market expectations for a mild report. The number will be disappointing in the broader sense that there is no sign that expansion is improving for the factory sector.

The component for orders managed to increase 1 point to 52.7 in May, but the reading is soft relative to the past two years. Production has tapered off with the index at 51.3 in May and was the lowest since 50.0 in August 2016. Employment rose a bit to 53.7 in May from 52.4 in April while remaining noticeably below the trend of last year. Delivery times were just above neutral at 52.0 in May indicating that activity has cooled and goods are seeing few delays along the supply chain. Businesses moved quickly to reduce inventories at the end of 2018, a trend that has continued into 2019. The May inventory index was just above neutral at 50.9, down a full 2 points from April.

The index for prices paid was up to 53.2 in May from 50.0 in April. Some of this is in energy costs, but more is due to increases in other commodities related to higher tariffs and competition for limited supplies.

The export order index moved back about the neutral mark to 51.0 in May and was in line with recent months were slower global demand for goods was cutting into orders. The index for imports remained about unchanged at 49.4 in May from 49.8 in April. Businesses are bringing in fewer goods at higher costs.

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