United States: Manufacturing conditions edge up in May
June 1, 2017
The ISM manufacturing index rose slightly in May after having declined for two consecutive months, providing further ground for the Federal Reserve to increase rates at its upcoming 13-14 June meeting. The indicator crept up to 54.9 in May from 54.8 in April, which was above market expectations of a small decline to 54.6. Although the index is down from the highs recorded at the onset of the year, it still rests well above the 50-threshold that separates expansion from contraction in the U.S. manufacturing economy, which suggests that momentum is far from abating.
The underlying details of May’s report are very encouraging on their own. Output growth slipped marginally in May, although at 57.1 on a 100-point scale it still remains one of the brightest spots in the survey. Demand for manufacturing production was reportedly stronger in the month, with new orders growth accelerating markedly. This prompted manufacturers to expand their payroll numbers at a faster pace than in April, allowing the backlog of orders to expand at a slower clip. After having swung back into expansionary territory in April, stocks of raw materials continued to mount in May, with firms likely expecting stronger production in the months to come. Meanwhile, input prices decelerated rapidly in May but inflation was brisk nonetheless.
May’s report sheds light on the near-term outlook of the U.S. manufacturing economy, after two months of decline had analysts wondering about the sector’s actual health. Particularly encouraging was the pick-up in staffing levels, which is expected to feed through into a strong reading on tomorrow’s employment report. Nonetheless, the road ahead for manufacturers remains a rough one, with political uncertainty surrounding the new administration’s stance on trade policy and ebbing global demand—highlighted by worsening PMI readings in several Asian emerging markets—likely to weigh on export-oriented activity.
Author: David Ampudia, Economist