ISM manufacturing data shows modest gains, coming off of steep declines

As the ongoing grip of the COVID-19 pandemic remains firm on the current state of manufacturing, it loosened, but only to a point, in May, when compared to April, a month replete with record lows, according to data in the most recent edition of the Institute for Supply Management’s (ISM) Manufacturing Report on Business, which was released today.

The report’s key metric—the PMI—at 43.1 (a reading of 50 or higher indicates growth) headed up 1.6% compared to April's 41.5, which was the lowest reading going back to April 2009’s 39.9. This marks the third straight month of declines, which was preceded by two months of growth. May’s reading was 5.2% below the 12-month average of 48.3. ISM also reported that the overall economy grew in May, following a decline in April, which snapped a stretch of 131 consecutive months of economic expansion.

ISM reported that six of the 18 manufacturing sectors it tracks saw growth in May, including: Nonmetallic Mineral Products; Furniture & Related Products; Apparel, Leather & Allied Products; Food, Beverage & Tobacco Products; Paper Products; and Wood Products. The 11 industries reporting contraction in May, in order, are: Printing & Related Support Activities; Primary Metals; Transportation Equipment; Petroleum & Coal Products; Fabricated Metal Products; Machinery; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; Chemical Products; Computer & Electronic Products; and Plastics & Rubber Products.

Most of the report’s key metrics saw gains in May.

New orders, which are commonly referred to as the engine that drives manufacturing, rose 4.7% to 31.8, coming off of a 15.1% decline to 27.1% in April, which marked the lowest reading for new orders since December 2008’s 25.9. ISM said four sectors saw new orders growth in May.

Production—at 33.2—headed up 5.7% over April, contracting for the third consecutive month. This topped April’s 27.5 reading, which was the lowest figure since numeric ISM Report On Business index records were first issued in January 1948, and is the second-lowest reading since January 2009’s 32.3. Four sectors reported production growth in May.

Employment—at 32.1—was up 4.6% compared to April's 27.5 and is the second lowest reading since May 2009’s 30.5, with the sector now having contracted for 10 straight months. The report noted that the top six manufacturing sectors saw strong employment contraction, resulting from furloughs and layoffs, due to a lack of new orders and stay-at-home directives, with only two sectors, apparel and leather & allied products showing growth in May.

May inventories—at 50.4—eked out a 0.7% gain, with inventory growth intact for the first time since May 2019, when it came in at 51.4. And supplier deliveries—at 68.0 (a reading over 50 indicates contraction—showed a 7.0% differential compared to April’s 76.0.

Comments from ISM members included in the report were somewhat mixed, with COVID-19 remaining the key theme.

“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,” said a Computer & Electronic Products respondent.

And a transportation equipment respondent explained that his company is seeing issues with suppliers that are affecting production, coupled with social distancing measures in the manufacturing plant and customer demand impacting the rate of production.

“Things are at the bottom, and now the question is are we going to stabilize, which I think we have, and then are we really going to be able to grow again, given the weak consumer confidence and the inability of the factory floor to get anywhere near the rates of production they were previously at in the fourth quarter,” said Tim Fiore, Chair of the ISM’s Manufacturing Business Survey Committee, in an interview. “That will be proved out in June and July, and we will see what that is.”

Fiore explained that a major issue for manufacturers, at the moment, is that they cannot put enough workers in the factory to achieve their desired levels of output, leading to an expanding of shift operations. Some manufacturers, he said, have been aggressive, whereas others have not.

“The story of the month was the demand side, with still very weak new orders, as well as new export orders [up 4.2% in May to 39,5 and down for the third straight month], and Europe is a particularly big concern there,” he said. “China is an issue, too, because we are going geopolitical with them, and we will see where that goes.”

Fiore also observed that customers’ inventories dropped 2.6% to 46.2, dropping “too low” at a faster rate and down over the last 44 months. While it is at a desired level, he said that it is not likely for the right reasons, due to customers restricting their inventory on hand and unsure if they will sell it.

“Our panelists are saying that their inventory is too low, and it probably is too low, but it is not because we are not satisfied,” he said. “I don’t think customers are wanting it. And the backlog of orders is still stubborn at 38.2, for the second straight month. That is a concern, because without that backlog really moving it means that new orders are not coming in, production is choking it all off, or both.”