via Mike Shedlock
The Manufacturing ISM was in contraction for 16 months went positive for a month and is contracting again for two months with order backlogs falling for 20 months.
Please consider the May 2024 Manufacturing ISM® Report On Business® emphasis mine.
Economic activity in the manufacturing sector contracted in May for the second consecutive month and the 18th time in the last 19 months, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.
The report was issued today by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee.
“U.S. manufacturing activity continued in contraction after growing in March, the first expansion for the sector since September 2022. Demand was soft again, output was stable, and inputs stayed accommodative. Demand slowing was reflected by the (1) New Orders Index dropping deeper into contraction, 2) New Export Orders Index edging back into marginal expansion, (3) Backlog of Orders Index regressing lower into contraction territory, and (4) Customers’ Inventories Index at the ‘just right’ level, neutral for future production.
The New Orders Index remained in contraction territory, registering 45.4 percent, 3.7 percentage points lower than the 49.1 percent recorded in April. The May reading of the Production Index (50.2 percent) is 1.1 percentage points lower than April’s figure of 51.3 percent. The Prices Index registered 57 percent, down 3.9 percentage points compared to the reading of 60.9 percent in April. The Backlog of Orders Index registered 42.4 percent, down 3 percentage points compared to the 45.4 percent recorded in April. The Employment Index registered 51.1 percent, up 2.5 percentage points from April’s figure of 48.6 percent.
Respondent Comments (Emphasis Mine)
- “Seems like a minor slowdown is happening. With less spending in the economy, less pressure on us for our products.” [Chemical Products]
- “Business conditions are pacing with budget and forecast for 2024. Certain markets are soft, but others are ahead of forecast, allowing us to maintain overall. Concerns with the economy continue to drive business decisions.” [Transportation Equipment]
- “Volume continues to be challenging, mostly due to inflationary impacts.” [Food, Beverage & Tobacco Products]
- “Orders have started to rebound, but inventory levels remain high enough for no impact on our supplier orders. It will take a few more strong months before supplier orders are reactivated or increased.” [Computer & Electronic Products]
- “Backlog is dwindling as we get caught up on orders; new orders are not coming in as robust as the backlog is going down. Inflation continues to be a problem with pricing of raw material and interest rates. We expect a flat rest of calendar year 2024, especially given that it’s a presidential election year.” [Machinery]
- “Export shipments continue to be soft as capital equipment sales remain lower than forecast. As a result, production is also trending lower and inventory that is not able to be pushed out is growing.” [Fabricated Metal Products]
- “Demand has been strong the first few months — ahead of budget, consistent with last year. Bookings are starting to slow down for May and June. We are monitoring this data closely to determine if it is a sign of decline or our typical cyclical demand.” [Electrical Equipment, Appliances & Components]
- “Business is picking up, with incoming bookings increasing.” [Furniture & Related Products]
- “Overall softening of markets for the month of June. Some impacts on a regional basis with the continued weather in the northeast, south and southeast regions. Delays in shipments continue across multiple regions.” [Petroleum & Coal Products]
- “General concern about overall industry economics. Pricing weakness continues, and we anticipate more headwinds in the coming months for spot orders and inflation. Contract order book remains steady.” [Primary Metals]
There are some positive comments but concerns about softening and inflation dominate.
New Orders
The New Orders Index hasn’t indicated consistent growth since a 24-month streak of expansion ended in May 2022. “Of the six largest manufacturing sectors, one (Chemical Products) reported increased new orders. Panelists indicated that the months of April and May experienced a slowing compared to the beginning of the year as housing, construction and capital expenditures activity continue to underperform,” says Fiore.
Employment
ISM®’s Employment Index registered 51.1 percent in May, 2.5 percentage points higher than the April reading of 48.6 percent. “The index indicated employment expanded after seven consecutive months of contraction. Of the six big manufacturing sectors, three (Food, Beverage & Tobacco Products; Transportation Equipment; and Chemical Products) expanded employment in May. Many Business Survey Committee respondents’ companies are continuing to reduce head counts through layoffs (which accounted for 38 percent of reduction activity, down from 50 percent in April), attrition and hiring freezes. 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,” says Fiore. An Employment Index above 50.3 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.
Input Prices
The ISM® Prices Index registered 57 percent, 3.9 percentage points lower compared to the April reading of 60.9 percent, indicating raw materials prices increased in May for the fifth month after eight consecutive months of decreases. Of the six largest manufacturing industries, five — Machinery; Chemical Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; and Fabricated Metal Products — reported price increases in May. “The Prices Index indicated strong expansion in May, but also easing compared to the previous month. Commodity prices continue to increase, especially fuel, natural gas, aluminum and plastics. Steel is showing signs of weakness. Twenty-six percent of companies reported higher prices in May, compared to 31 percent in April,” says Fiore. A Prices Index above 52.8 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Producer Price Index for Intermediate Materials.
Order Backlogs
ISM®’s Backlog of Orders Index registered 42.4 percent, down 3 percentage points from the 45.4 percent reported in April, indicating order backlogs contracted for the 20th consecutive month after a 27-month period of expansion. Only one of the six largest manufacturing industries (Chemical Products) reported expanded order backlogs in May. “The index remained in contraction in May, as new order rates were insufficient to allow backlogs to grow,” says Fiore.
More Economic Weakening
The ISM report suggests more weakening of the economy, with a small hint of stagflation.
The ISM is a diffusion index where direction matters more than amount. For example, a firm hiring 2 people will offset another laying off 200.
This is soft data, but it is consistent with overall weakening shown in hard data.
I believe we are headed for recession this year, but we are not there yet in the first quarter.
Odds of a a recession in the second quarter are increasing.
For discussion, please see Philadelphia Fed GDPplus Revised Significantly Lower, But No Recession Yet
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