ISM: Moderate Manufacturing Recovery Amid Rising Prices
May’s ISM report signals continued moderate gains in the manufacturing sector. Production, new orders and export orders support the case for growth. Prices paid hint at rising input costs for manufacturers.
Fading: USD Less Strong, Prices and Global Growth Firm a Bit
Manufacturing activity continued to recover in May, with the ISM index coming in at 51.3 (top chart). This third consecutive reading above breakeven indicates the manufacturing sector is recovering from the weight of the strong dollar, collapsing commodity prices and weakening global growth. While many challenges persist for the industry, the report offers some indication that the worst of the manufacturing slump is fading.
Supporting the composite index was continued expansion in production, new orders and export orders. Current production remained in expansion mode for the fifth straight month with the index coming in at 52.6. Twelve sectors registered improvement in production, including paper, electrical equipment, textile mills and fabricated metals.
Orders as a Leading Indicator, Export Orders a Plus
Also encouraging was the continued positive numbers for new orders at 55.7 (middle chart). The new orders index intimates that growth in current production should not give way in the near term. Fourteen industries registered a gain in new orders (only four saw a decrease) with improvement in paper, plastics, chemicals and fabricated metals. Unfortunately backlogs fell below break-even with only six industries reporting a gain—this suggests moderate, not rapid, growth ahead.
Supporting new orders was a third consecutive plus-50 read on export orders. The export orders index remained at 52.5, and while not seasonally adjusted, the index remains at its highest level since November 2014. Six industries reported a gain in export orders. While the dollar still sits at relatively strong levels, the giveback since January looks to be offering some relief to manufacturers selling overseas. Inventories continued to contract in May, with the index slipping to 45.0. Manufacturers reported that customer inventories were at break-even, indicating appropriate levels.
Employment Still Soft, but Near-Term Support for Inflation
Respondents continued to report weak hiring conditions. The employment index remained in contraction territory at 49.2, which suggests another cut to manufacturing payrolls in this Friday’s payroll report.
Prices are the main story from this report. Manufacturers reported an increase in input prices for the third straight month in May and the prices paid component is now at its highest level since 2011. The rise for input prices puts a squeeze on profits and prompts concerns of further Fed rate hikes. Thirteen of the 18 industries reported a rise in prices including plastics, fabricated metals and machinery. Commodities up in price include copper, steel and polypropylene.