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Recap: The five District Bank surveys of manufacturing and services lifted off record lows in May

With all five District Bank surveys of manufacturing in hand, conditions look good for a mild increase in the ISM Manufacturing Index for May when that report is released at 10:00 ET on Monday, June 1.

An average of the five headline indexes from the New York, Philadelphia, Richmond, Dallas, and Kansas City Feds is at -37.4 in May, a substantial gain from the -58.3 average for April. The average has a very strong correlation (0.950) with the ISM index. I would anticipate an increase from the ISM’s 41.5 reading in April, perhaps as much as to 43.0 for May. That forecast would put the level of the index narrowly above the 42.8 threshold that the ISM says is consistent with recessionary conditions for the wider economy. However, if the forecast proved accurate, I would not interpret is as a signal that the economy is poised for better times in the immediate future. Still, it seems the factory sector is starting to breathe and adapt after the initial shock of the shutdowns associated with the COVID-19 pandemic.

The same might be said of the service sector. The five District Bank surveys for non-manufacturing in May all point to at least some improved activity, and most of the indexes rose noticeably from record low readings in April. The average of the five headlines was -51.0 in May, up from the -79.9 in. The average as a good correlation (0.850) with the ISM Non-Manufacturing index. I would look for an increase in the ISM measure from the 41.8 in April to around 43.5 in May when the data is reported at 10:00 ET on Wednesday, June 3.

Public-facing services have wherever possible taken steps to preserve what business they can through finding a way to deliver in compliance with social distancing and public health safety protocols. Between that and the lifting of some restrictions, the service sector regaining some activity. However, conditions are still very difficult and revenues deeply curtailed.

Note: The ISM says of the Manufacturing Index, “A PMI® above 42.8 percent, over a period of time, indicates that the overall economy, or gross domestic product (GDP), is generally expanding; below 42.8 percent, it is generally declining.” For the Non-Manufacturing Index, “An NMI® above 48.5 percent, over time, generally indicates an expansion of the overall economy.” This isn’t a hard-and-fast rule, but it is a reasonable gauge over a period of a few months as to where the economy is in the business cycle.

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