ISM report points to slight May manufacturing gains

Manufacturing output, for the month of May, eked out a slight gain over April, while remaining in growth mode, according to the most recent edition of the Manufacturing Report on Business, which was issued today by the Institute for Supply Management (ISM).  

The report’s key metric, the PMI, came in at 56.1 (a reading of 50 or higher indicates growth), for a 0.7% increase over March’s 55.4 reading, marking the 24th consecutive month of growth, at a faster rate, as well as the 24th consecutive month of overall economic growth.

May’s PMI reading is 2.7% below the 58.8 average over the last 12 months, with June 2021’s 60.9 and April’s 55.4 marking the respective high and low readings for that period. What’s more, March and April’s PMI readings represent the two lowest monthly PMI readings since September 2020’s 55.4.

ISM reported that 15 manufacturing sectors reported growth in May, including: Apparel, Leather & Allied Products; Printing & Related Support Activities; Machinery; Nonmetallic Mineral Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; Transportation Equipment; Paper Products; Petroleum & Coal Products; Plastics & Rubber Products; Fabricated Metal Products; Chemical Products; Miscellaneous Manufacturing; Primary Metals; and Electrical Equipment, Appliances & Components. Each of the six largest manufacturing sectors— Machinery; Computer & Electronic Products; Food, Beverage & Tobacco Products; Transportation Equipment; Petroleum & Coal Products; and Chemical Products—saw moderate to strong May gains, added ISM. The lone industry seeing a decline was Furniture & Related Products.

The report’s key metrics were mixed in May.

New orders, which are commonly viewed as the engine that drives manufacturing, saw a 1.6% gain, to 55.1, following a 0.3% April decline, while growing, at a faster rate, for the 24th consecutive month. ISM said each of the six largest manufacturing sectors—and 11 in total—reported growth.

Production—at 54.2—saw a 0.6% increase, growing, at a faster rate, for the 24th consecutive month, with five of the six largest sectors—and eight overall—growing. ISM noted that demand remains strong, with hiring and material availability showing continued signs of recovery, while factories remain challenged to hit “optimum floor rates,” mostly due to high levels of employee turnover.  

Employment—at 49.6—dropped 1.3%, contracting after eight consecutive months of growth, marking its lowest reading since November 2020’s 48.1, with three of the six largest manufacturing sectors growing and eight growing overall. ISM said that its panelists’ companies continue to struggle to meet labor management plans, while there are signs of improvement. And it also observed that 7% of them are seeing greater hiring ease, which is up from April’s 1%, while 89% of Employment comments were hiring-focused. ISM said that its survey panelists’ companies are still indicating employment levels are being driven by a primarily by turnover and a small labor pool and affecting further output growth.

Other notable metrics in the report included:

• Supplier Deliveries—at 65.7 (a reading above 50 indicates contraction)—slowed, at a slower rate, for the 75th consecutive month, with the reading off from May’s 67.2. ISM said that this reading continues to reflect suppliers’ difficulties in meeting demand from panelists’ companies;
• Backlog of Orders—at 58.7—increased 2.7%, growing, at a faster rate, for the 23rd consecutive month, with ISM saying that backlogs expanded in May at a faster rate, as output remains constrained and new orders continue at moderate levels;
• Inventories—at 55.9—increased 4.3%, growing, at a faster rate, for the 10th consecutive month, and Customers’ Inventories—at 32.7—down 4.4%, decreasing too low, at a faster rate for the 68th consecutive month; and
• Prices—at 82.2—decreased 2.4%, increasing, at a slower rate, for the 24th consecutive month

Comments from ISM member panelists in the report showed some familiar themes, including supply chain issues and pricing, among others.

A Miscellaneous Manufacturing respondent said that supply chain issues are causing his company to dramatically extend lead times, with production lines running low or are out of parts needed to complete rates every week in May.

And a Plastics & Rubber Products respondent said that price increases have not let up.

“I thought 2022 was going to be better, but it hasn’t been,” said the respondent. “Shortages (among other issues) are still disrupting the supply chain.”

In an interview, Tim Fiore, Chair of the ISM’s Business Survey Committee, said that when looking at May’s data, the seasonally-adjusted factors were about half of what they were compared to April’s. And he said when taking out the last three months of seasonally-adjusted factors, the PMI has come down about a point a month.

“Overall, May was a really good story,” he said. “What we are seeing here is an easing in supply chain issues and easing in pricing, both very small but nonetheless still there. Once we take the artificial impacts out, like Omicron in January, Russia invading Ukraine in February and March, we are back on track here to get back to equilibrium. Economic forces are driving it in that direction. We saw a decline in backlog and an increase in customer inventories in April, which reversed in May. There is not a concern on the demand side, but on the input side [supplier deliveries, inventories, and imports], we are seeing things as being a little bit slow but steady.”

The underlying theme within manufacturing though, said Fiore, remains labor, with companies still struggling to get enough people on factory floors, with it not being as much of a hiring issue as it is in keeping employees, which he cited as the dominant reason for the employee data in May.

“We cannot increase the production number to where it should be [at around 58], due to the labor,” he said.

Addressing inventories, Fiore described May’s 55.9 as a very healthy number, calling it about as strong as it could be at this time, with a lot of semi-finished products in the manufacturing pipeline, with companies essentially taking whatever they can get, in the form of a lot of unusual inventory that they would not usually have. And he added that this comes at a time when lead times are still at record levels, as are capex and raw materials’ lead time.

“Until those start coming down, we will remain in a demand-driven range,” he said.