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First Cut: Kansas City Fed Manufacturing Composite Index improved in May, if still in contraction

The Kansas City Fed’s Manufacturing Composite Index remained consistent with recession in May at -19, but was decidedly better than the series low of -30 in April. The six month composite index rose to -2 in May from -6 in April. Survey respondents’ comments suggested that after the initial shock of widespread shutdowns and plunging oil prices and their attendant uncertainties, manufacturers were finding their way through the situation. Right now it appears they want guidance and hard information on which to base their next business decisions as they gauge the risks of reopening before the COVID-19 pandemic is fully contained.

The index for new orders improved substantially to -25 in May after -64 in April. Order backlogs continued to contract at -13 in May after -34 in April. New orders for exports did not show a similar gain at -25 after -29, probably due to the global recession.

The indexes associated with the labor market showed employment was still contracting but at a slower rate at -13 after -34 and the average workweek shortened less at -20 after -51. Fewer workers and/or fewer hours are needed to meet current production. The production index remained weak at -25, if in better shape than the record low of -62 in April.

Supplier delivery times were shorter at -8 in May after lengthening at 26 in April. Goods are starting to move more freely along supply chains. Inventories continued to contract at -11 in May but less so than the -16 in April.

Prices paid increased less slowly in May with an index of -6 after -16 in the prior month. Energy prices declines started to reverse in recent weeks, although these remain quite low in the historical context. The prices received index was -9 in May after -14 in April with little pricing power at present.

The Kansas City-ISM equivalent index rose to 42.1 in May after 35.0 in April. The calculation correlates moderately well (0.755) with the ISM Manufacturing Index. More importantly, this is quite a similar upward movement to the other four District Bank surveys of manufacturing equivalent indexes. It strongly hints that the ISM Manufacturing Index will be firmer than the 41.5 in April when the May numbers are released at 10:00 ET on Monday, June 1.

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