May data pointed to another loss of momentum across the U.S. manufacturing sector. New business growth eased to its weakest so far in 2016, which contributed to a decline in production volumes for the first time in over six-and-a-half years. Survey respondents noted that subdued client demand and heightened economic uncertainty had resulted in challenging trading conditions. Manufacturing payroll numbers nonetheless picked up slightly in May, which firms linked to new product launches and sustained optimism regarding the longer-term business outlook.
At 50.7 in May, the seasonally adjusted Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) was down fractionally from 50.8 in April and pointed to the weakest manufacturing performance since September 2009. Lower production levels were the main downward influence on the headline PMI in May. Although only marginal, this was the first overall reduction in manufacturing output recorded by the survey for more than six-and-a-half years. Anecdotal evidence suggested that softer new order growth and efforts to rein in inventory accumulation had exerted negative influences on production schedules.
The latest survey highlighted only a modest increase in new business intakes, with the pace of expansion easing to a five-month low. Manufacturers cited a range of factors acting to dampen client spending, including weak capital investment across the energy sector, uncertainty related to the presidential election and generally subdued economic conditions. Added to this, a marginal drop in export sales also weighed on overall new business growth in May.
A slower upturn in new orders enabled another reduction in backlogs of work during May. Despite little sign of pressure on operating capacity, the latest survey signalled a marginal rise in payroll numbers and the rate of jobs growth picked up slightly from April’s near three-year low. Additional staff hiring was linked to new product launches and longer-term expansion plans.
Manufacturers continued to report cautious inventory strategies during May, leading to a fall in stocks of purchases for the sixth month running. Post-production inventories rose slightly, but this was partly linked to weaker than expected sales.
Input cost inflation remained modest in comparison to its post-crisis trend, despite accelerating to the fastest since August 2015. There were widespread reports citing higher steel prices in May. At the same time, factory gate charges were broadly unchanged, which ended a three-month period of price discounting.
The ISM PMI:
The May PMI® registered 51.3 percent, an increase of 0.5 percentage point from the April reading of 50.8 percent. The New Orders Index registered 55.7 percent, a decrease of 0.1 percentage point from the April reading of 55.8 percent. The Production Index registered 52.6 percent, 1.6 percentage points lower than the April reading of 54.2 percent. The Employment Index registered 49.2 percent, the same reading as in April. Inventories of raw materials registered 45 percent, a decrease of 0.5 percentage point from the April reading of 45.5 percent. The Prices Index registered 63.5 percent, an increase of 4.5 percentage points from the April reading of 59 percent, indicating higher raw materials prices for the third consecutive month. Manufacturing registered growth in May for the third consecutive month, as 14 of our 18 industries reported an increase in new orders in May (down from 15 in April), and 12 of our 18 industries reported an increase in production in May (down from 15 in April).
ISM®’s New Export Orders Index registered 52.5 percent in May, the same reading as in April. This month’s reading indicates growth in new export orders for the third consecutive month.
The ISM and Markit PMIs have recoupled in the last 2 months, indicating the superiority of Markit’s survey (chart from Zerohedge)