Manufacturing: ISM reports sector cooling off after rapid growth through first 4 months of 2011

After four straight months of rapid growth in the manufacturing sector to kick off 2011, the Institute for Supply Management (ISM) reported today that overall activity was down somewhat in May.

In its May Manufacturing Report on Business, the ISM reported that the index it uses to measure the manufacturing sector—known as the PMI—was 53.5 percent in May, down 6.9 percent from April, marking the first time in 2011 that the PMI did not crack 60.

Any PMI reading 50 or higher represents economic growth. And despite the sequential decline, May is the 24th consecutive month economic growth has occurred in the overall economy and the 22d consecutive month economic activity in the manufacturing sector has occurred, according to the report.

“This month’s index…[is] the lowest PMI reported for the last 12 months,” said Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, in a statement. “Slower growth in new orders and production are the primary contributors to this month’s lower PMI reading. “Manufacturers continue to experience significant cost pressures from commodities and other inputs.”

New orders were down 10.7 percent at 51.0, and production was off 9.8 percent at 54.0. Other notable readings include employment down 4.5 percent at 58.2, which Holcomb said reflects good momentum. And inventories and customer inventories were down 4.9 percent and 1.0 percent, respectively at 48.7 and 39.5. Prices were down 9.0 percent at 76.5.

In an interview with LM, Holcomb noted that while the rate of growth fell off in May, overall growth in the manufacturing sector has been occurring for nearly 2 years.

“It is an interesting correction, although new orders and production are off the highs set from earlier in the year,” said Holcomb. While we saw excellent numbers for the first four months of the year we are now inevitably seeing…companies taking their foot off of the accelerator.”

Even though the May data was down, Holcomb said there were continuing signs of cautious optimism occurring, including a solid employment index that reached a 38-year collective high through the first four months of the year.

But the most influential factor in the May numbers was pricing as it relates to energy and commodities, he said.

“Pricing was down 9.0 percent,” said Holcomb. “There is some hope that if additional softening continues, especially on the energy side, we can see that translate into growth for the sector, as long as we see a continued slowing down in pricing,” he said.

Looking at inventories, Holcomb observed that at 48.7 in May they are down for the third time in the last four months and hovering around the 50 mark. This, he said, shows how companies are very carefully and thoughtfully matching their inventories according to the demand of new orders they have and are being very successful at it.

And with staying on top of inventories often difficult, he said it is a very good time that companies are not getting ahead of themselves and are doing a solid job of managing their inventories effectively.  Customer inventories at 39.5 are considered too low and reflects a good potential draw from the customer base, with room for more restocking with customers, and is a positive indicator in this mix, according to Holcomb.