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First Cut: ISM Manufacturing Index puts factory sector in recession for a third month in row in May

The ISM Manufacturing Index rose to 43.1 in May from 41.5 in April. The index hasn’t reflected much in the way of expansion since August 2019. However, the last three months have clearly been associated with the overall downturn for the national economy, not just sectoral weakness in the face of uncertain trade policy. The May reading lifts the index a little above the ISM’s threshold of 42.8 for broader expansionary conditions. The report said the overall economy was growing in May from contracting, but given the narrowness of the gap between the threshold and the headline this should be read with caution. In any case, manufacturing contracted for a third month in a row even though all five index components were decreasing more slowly.

New orders rose to 31.8 in May after 27.1 in April. The index for order backlogs – not a component – was little changed at 38.2 after 37.8 with few orders in the pipeline to support activity. New export orders – also not a component – were up to 39.5 in May after 35.3 in April. One comment from a survey respondent said, “Despite the COVID-19 issues, we are seeing an increase of quoting activity. This has not turned into orders yet, but it is a positive sign.”

The production index was up to 33.2 in May from 27.5 in April and was less of a negative. Supplier deliveries declined to 68.0 after 76.0 in the prior month and suggested that delays along supply chains due to lack of production and difficulties in shipping were less severe. The index for inventories remained near neutral at 50.4 in May from 49.7 in April as businesses tightly controlled stocks on hand to keep them from building while the economy was struggling. The index for imports – not a component – was down to 41.3 in May from 42.7 in April and suggest that goods from abroad were not as available as they had been in the prior month.

The May index for prices paid rose to 40.8 after 35.3 in the prior month. Some of this was due to the increase in energy prices. However, overall prices are rising slowly and not exerting upward pressure on inflation.

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