United States PMI May 2018

United States

United States: ISM manufacturing index picks up in May on the back of a strong domestic economy

June 1, 2018

The U.S. manufacturing sector kept up its stellar momentum in May, despite concerns in recent months that trade tensions and a global moderation in growth would dampen activity in the sector. The Institute for Supply Management (ISM) manufacturing index increased to 58.7, up from 57.3 in April and slightly exceeding market expectations of 58.5. The index remained comfortably above the 50-point threshold that separates expansion from contraction in the U.S. manufacturing sector, where it has been for 21 consecutive months.

The uptick in the index in May was largely the result of strong domestic dynamics. Both output and employment growth picked up markedly, while new orders also strongly increased after slowing in March and April. However, new export orders fell compared to April, signaling weakening external demand for U.S. manufactured products. This indicates an increasing degree of divergence between the strong momentum of the U.S. economy and that of the rest of the world. Indeed, analysts have been concerned by weaker-than-expected PMI data in Europe and parts of Asia in recent months, as well as the effects of current trade negotiations between the U.S., China and other important trade partners on global supply chains and demand. Nevertheless, the U.S. manufacturing sector seemed to keep running at full capacity in May, as backlogs of orders rose at a faster pace in the month.

Demand remained strong in May, with customers’ inventories depleting at a markedly faster rate in the month. Meanwhile, manufacturers’ inventory levels, which had been increasing in past months, could barely keep up with demand in May and were essentially unchanged. This coincided with a further lengthening of suppliers’ delivery times, highlighting both a high level of demand as well as signs of strain in the supply chain.

Finally, the ISM price index reached its highest level since mid-2011, with large price increases being reported across most industries. Survey respondents emphasized several points of concern on this front. Shortages of inputs, notably electronic components and labor, were mentioned, as well as the rising price of oil. An often-mentioned concern was the steel tariffs recently imposed by the U.S. on most of its trading partners. More generally, manufacturers worried about the ongoing trade tensions with China, increasing uncertainty for numerous firms that rely heavily on China in their supply chains. This uncertainty has already caused some of the survey’s respondents to look for alternative sourcing options for their inputs, although these sources might be less competitive and thus costlier. It has also incited firms to stockpile raw materials for fear of coming shortages, driving up prices. Over the near-to-medium term, a main risk, if tensions escalate, would be the negative effect on global business confidence, which could hamper growth in investments.

FocusEconomics Consensus Forecast panelists expect industrial production to increase 3.4% in 2018, which is up 0.3 percentage points from last month’s forecast. In 2019, panelists see industrial production expanding 2.2%.

Author:, Economist

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United States PMI Chart

USA PMI May 2018

Note: Composite index in the Manufacturing Report on Business (PMI). Readings above 50% indicate an expansion in the manufacturing sector while readings below 50% point to a contraction.
Source: Institute for Supply Management.

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