ISM reports May manufacturing data hits a rough patch

Manufacturing activity in May contracted for the first time since November 2012, according to the Institute for Supply Management (ISM).

The PMI, the index used by the ISM to measure manufacturing activity—at 49 in May was down 1.7 percent from April’s 50.7 and 2.3 percent below March’s 51.3. A reading of 50 or higher indicates growth is occurring, and prior to May the PMI had been over the 50 mark for the last five months. May’s PMI was 2.1 percent below the 12-month average of 51.1 and is the lowest PMI in the last 12-months.

May’s PMI is at its lowest level since June 2009’s 45.8.

Economic activity in the manufacturing sector had expanded for 34 straight months prior to contraction in June 2012, and overall economic activity has now expanded for 48 straight months, according to ISM.

New Orders, which are often referred to as the engine that drives manufacturing, were down 3.5 percent to 48.8 in May and is the first month New Orders have contracted since December 2012, when it was at 49.7. Production in May fell 4.9 percent to 48.6 from April’s 53.5 and showed contraction for the first time since August 2012 at 48.9 and is only the second time it has contracted since May 2009. Employment was essentially flat, falling 0.1 percent to 50.1.

“The PMI at 49 is disappointing, and it is also momentary from the sense I have of the data and it is inconsistent compared to the data from our semiannual forecast, which forecasted revenue growth of 4.8 percent” said Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, in an interview. “I still think we are well positioned for the second half of the year, but we are in sort of unknown territory here, as this was a down month.”

New Orders were down in eight sectors tracked by the ISM, which Holcomb said was a significant reason for May’s decline. What’s more, of the eight sectors showing declines, four of the biggest were among those with lighter orders in May: computer & electronic products; chemical products; transportation equipment; and petroleum & coal products.

As for May Production, Holcomb explained that the 4.9 percent drop was a response—
or a measured move—due to the fact that New Orders were not appearing.

“You don’t want to overproduce in a situation like this and put yourself in a bad place relative to employment or inventories,” he said. “I think this is a response as Backlog of Orders (down 5.0 percent to 48.0 in May) also contracted, so if there was a strong backlog, there might have been more production activity. But I think this is a measured move on the part of manufacturers.”

May Supplier Deliveries decreased 2.2 percent to 48.7, and Holcomb said that number is a reflection of suppliers having too much inventory that allowed them to respond faster or deliver their supplies faster. Inventories were up 2.5 percent to 49.0.

Prices were down 0.5 percent to 49.5, with total prices down a cumulative 12 percent over the last three months. Holcomb said this situation is OK for a short period of time as prices tend to rise over the first three months of the year, when suppliers roll out price increases.