| Consensus | Consensus Range | Actual | Previous | |
|---|---|---|---|---|
| Index | 49.8 | 48.8 to 50.1 | 48.7 | 49.2 |
Highlights
US manufacturing activity was in contraction for a second straight month in May after a brief popup into growth territory in March as new orders declined sharply amid uncertainty over when the Federal Reserve will cut interest rates to support demand, according to the Institute for Supply Management. The sector index compiled by the ISM, which shows general direction, fell 0.5 percentage points to 48.7 in May after falling 1.1 points to 49.2 in April and rising 2.5 points to 50.3 in March. It was weaker than the median economist forecast of 49.8.
"Demand remains elusive as companies demonstrate an unwillingness to invest due to current monetary policy and other conditions," Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement."These investments include supplier order commitments, inventory building and capital expenditures.""Production execution continued to expand but was essentially flat compared to the previous month," he said."Suppliers continue to have capacity, with lead times improving and shortages not as severe."
Fiore told reporters that the ISM's main index is now in a lower range of 47 to 51, down from 49 to 53 seen earlier this year, in the absence of"assurances" of a Fed rate cut."Our panelists and their customers are reluctant to make any kind of commitments until they see some kind of action on the rate side," Fiore said."People are still concerned about recession, concerned about the Fed keeping rates higher for longer." This promoted manufacturers to expect capital expenditures to rise just 1.0% in 2024 in the ISM's latest semiannual survey released last month, down sharply from the 11.9% surge forecast in December, he noted.
In response to questions, he said the manufacturing sector is likely to be"stable" without a Fed rate cut during the summer months of June, July, August, when activity slows down seasonally. Asked whether an interest rate cut by the Federal Reserve in September, as expected by markets, could trigger an unwanted surge in capital investment from the viewpoint of guiding inflation lower, Fiore replied that it is unlikely to explode but said,"I would expect a positive move in new orders…to a range of 50 to 53."
Among the five subindexes that directly factor into the manufacturing PMI, the new orders index slumped 3.7 points to a 12-month low of 45.4 in May (the weakest since 42.9 in May 2023) after falling 2.3 points to 49.1 in April and rebounding 2.2 points to 51.4 in March. The index at 52.5 in January marked its first growth in 17 months. The production index was in growth territory for three months in a row but dipped 1.1 points to 50.2 in May after slumping 3.3 points to 51.3 in April and jumping 6.2 points to 54.6 in March.
The employment index improved for the third straight month to show growth for the first time in eight months, rising 2.5 points to 51.1 in May after climbing 1.2 points to 48.6 in April. Panelists' comments in May indicated an increase in staff reductions compared to April."The approximately 1-to-1 ratio of hiring versus reduction comments is consistent with activity from November 2023 through March," said Fiore, who had predicted last month that employment was on its way toward expansion in coming months. But Fiore also warned against reading too much into the latest figure, saying, 51.1 is not much different from 48.6.
The delivery performance of suppliers to manufacturers was"faster" for the third straight month after one month of slowing preceded by 16 straight months in"faster" territory. The supplier deliveries index was unchanged at 48.9 after dipping 1.0 point to the level. This is the only ISM subindex that is inversed; a reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases. The manufacturing inventories index contracted for 16 months in a row. It slipped 0.3 point to 47.9 in May after being unchanged at 48.2 in April.
Among other subindexes, the prices index indicated growth for the fifth month in a row after showing the first increase in nine months in January. The index fell 3.9 points to 57.0 in May after surging 5.1 points in April to 60.9, which was the highest since 78.5 recorded in June 2022.
"Demand remains elusive as companies demonstrate an unwillingness to invest due to current monetary policy and other conditions," Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement."These investments include supplier order commitments, inventory building and capital expenditures.""Production execution continued to expand but was essentially flat compared to the previous month," he said."Suppliers continue to have capacity, with lead times improving and shortages not as severe."
Fiore told reporters that the ISM's main index is now in a lower range of 47 to 51, down from 49 to 53 seen earlier this year, in the absence of"assurances" of a Fed rate cut."Our panelists and their customers are reluctant to make any kind of commitments until they see some kind of action on the rate side," Fiore said."People are still concerned about recession, concerned about the Fed keeping rates higher for longer." This promoted manufacturers to expect capital expenditures to rise just 1.0% in 2024 in the ISM's latest semiannual survey released last month, down sharply from the 11.9% surge forecast in December, he noted.
In response to questions, he said the manufacturing sector is likely to be"stable" without a Fed rate cut during the summer months of June, July, August, when activity slows down seasonally. Asked whether an interest rate cut by the Federal Reserve in September, as expected by markets, could trigger an unwanted surge in capital investment from the viewpoint of guiding inflation lower, Fiore replied that it is unlikely to explode but said,"I would expect a positive move in new orders…to a range of 50 to 53."
Among the five subindexes that directly factor into the manufacturing PMI, the new orders index slumped 3.7 points to a 12-month low of 45.4 in May (the weakest since 42.9 in May 2023) after falling 2.3 points to 49.1 in April and rebounding 2.2 points to 51.4 in March. The index at 52.5 in January marked its first growth in 17 months. The production index was in growth territory for three months in a row but dipped 1.1 points to 50.2 in May after slumping 3.3 points to 51.3 in April and jumping 6.2 points to 54.6 in March.
The employment index improved for the third straight month to show growth for the first time in eight months, rising 2.5 points to 51.1 in May after climbing 1.2 points to 48.6 in April. Panelists' comments in May indicated an increase in staff reductions compared to April."The approximately 1-to-1 ratio of hiring versus reduction comments is consistent with activity from November 2023 through March," said Fiore, who had predicted last month that employment was on its way toward expansion in coming months. But Fiore also warned against reading too much into the latest figure, saying, 51.1 is not much different from 48.6.
The delivery performance of suppliers to manufacturers was"faster" for the third straight month after one month of slowing preceded by 16 straight months in"faster" territory. The supplier deliveries index was unchanged at 48.9 after dipping 1.0 point to the level. This is the only ISM subindex that is inversed; a reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases. The manufacturing inventories index contracted for 16 months in a row. It slipped 0.3 point to 47.9 in May after being unchanged at 48.2 in April.
Among other subindexes, the prices index indicated growth for the fifth month in a row after showing the first increase in nine months in January. The index fell 3.9 points to 57.0 in May after surging 5.1 points in April to 60.9, which was the highest since 78.5 recorded in June 2022.
Market Consensus Before Announcement
After falling back into contraction in April to a much lower-than-expected 49.2, the ISM manufacturing index in May is expected to recover but to no better than 49.8.
Definition
The manufacturing composite index from the Institute for Supply Management is a diffusion index calculated from five of the eleven sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms nationwide. The survey queries purchasing managers about the general direction (tracked in volumes) of production, new orders, order backlogs, their own inventories, customer inventories, employment, supplier deliveries, exports, and imports. Data on changes in input prices (prices paid) are also tracked. The five components of the composite index are new orders, production, employment, supplier deliveries, and inventories (their own, not customer inventories). The five components are equally weighted. The questions are qualitative rather than quantitative; that is, they ask about the general direction rather than the specific level of activity. Each question is adjusted into a diffusion index which is calculated by adding the percentage of positive responses to one-half of the unchanged responses.
Description
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the ISM manufacturing index, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.
The ISM manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. More than one of the ISM sub-indexes provide insight on commodity prices and clues regarding the potential for developing inflation. The Federal Reserve keeps a close watch on this report which helps it to determine the direction of interest rates when inflation signals are flashing in these data. As a result, the bond market is highly sensitive to this report.
Importance
The ISM manufacturing composite index indicates overall factory sector trends. The relevance of this indicator is enhanced by the fact that it is available very early in the month and is not subject to revision.
Interpretation
The bond market will rally (fall) when the ISM manufacturing index is weaker (stronger) than expected. Equity markets prefer lower interest rates and could rally with the bond market. However, a healthy manufacturing sector, indicated by rising ISM index levels, bodes well for corporate earnings and is bullish for the stock market.
The level of the ISM manufacturing index indicates whether manufacturing and the overall economy are growing or declining. Historically, readings of 50 percent or above are associated with an expanding manufacturing sector and healthy GDP growth overall. Readings below 50 indicate a contracting manufacturing sector but overall GDP growth is still positive until the ISM index falls below 42.5 (based on statistics through January 2011). Readings in between these two levels suggest that manufacturing is declining while GDP is still growing but only very slowly.
In addition to the ISM manufacturing composite index, the various sub-components contain useful information about manufacturing activity. The production component is related to industrial production, new orders to durable goods orders, employment to factory payrolls, prices to producer prices, export orders to merchandise trade exports and import orders to merchandise imports.
Vendor (supplier) deliveries are an important component of report. The more slowly orders are filled and delivered, the stronger the economic growth and the greater the potential for inflation. When orders are filled quickly, it means that producers don't have as many to fill.
The ISM manufacturing composite index and its sub-components can be subject to some monthly volatility, making the three-month average of the monthly levels more indicative of the trend.
The ISM manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. More than one of the ISM sub-indexes provide insight on commodity prices and clues regarding the potential for developing inflation. The Federal Reserve keeps a close watch on this report which helps it to determine the direction of interest rates when inflation signals are flashing in these data. As a result, the bond market is highly sensitive to this report.
Importance
The ISM manufacturing composite index indicates overall factory sector trends. The relevance of this indicator is enhanced by the fact that it is available very early in the month and is not subject to revision.
Interpretation
The bond market will rally (fall) when the ISM manufacturing index is weaker (stronger) than expected. Equity markets prefer lower interest rates and could rally with the bond market. However, a healthy manufacturing sector, indicated by rising ISM index levels, bodes well for corporate earnings and is bullish for the stock market.
The level of the ISM manufacturing index indicates whether manufacturing and the overall economy are growing or declining. Historically, readings of 50 percent or above are associated with an expanding manufacturing sector and healthy GDP growth overall. Readings below 50 indicate a contracting manufacturing sector but overall GDP growth is still positive until the ISM index falls below 42.5 (based on statistics through January 2011). Readings in between these two levels suggest that manufacturing is declining while GDP is still growing but only very slowly.
In addition to the ISM manufacturing composite index, the various sub-components contain useful information about manufacturing activity. The production component is related to industrial production, new orders to durable goods orders, employment to factory payrolls, prices to producer prices, export orders to merchandise trade exports and import orders to merchandise imports.
Vendor (supplier) deliveries are an important component of report. The more slowly orders are filled and delivered, the stronger the economic growth and the greater the potential for inflation. When orders are filled quickly, it means that producers don't have as many to fill.
The ISM manufacturing composite index and its sub-components can be subject to some monthly volatility, making the three-month average of the monthly levels more indicative of the trend.
