Manufacturing activity fell in May; uncertainty persists

Economic activity in the manufacturing sector moderated from April to May as uncertainty remains on when growth will return, according to the Institute for Supply Management (ISM). May was the seventh consecutive month of decline.

On Thursday (June 1), the ISM released the May Manufacturing ISM Report on Business that shows the purchasing managers’ index (PMI) fell by 0.2 percentage points to 46.9% from 47.1% in April. A PMI below 50% indicates that manufacturing activity is contracting.

According to the report, new orders and backlogs contracted, but production and employment increased. Supplier deliveries were faster. Raw materials inventories declined. Customers’ inventories remained too high. Prices declined. Exports were flat, and imports fell.

“The U.S. manufacturing sector shrank again, with the Manufacturing PMI losing a bit of ground compared to the previous month, indicating a faster rate of contraction,” said Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee. “The May composite index reading reflects companies continuing to manage outputs to better match demand for the first half of 2023 and prepare for growth in the late summer/early fall period. However, there is clearly more business uncertainty in May.”

Panelists were mixed on employment, with nearly equal levels of activity toward expanding and reducing staff at their companies, amid mixed sentiment about when growth will return.

Four manufacturing industries reported growth in May: Nonmetallic mineral products; furniture and related products; transportation equipment; and fabricated metal products.

“New order rates contracted further, as panelists remain concerned about when manufacturing growth will resume,” Fiore said. “Panelists’ comments again registered a 1-to-1 ratio regarding optimism for future growth and continuing near-term demand declines. Supply chains are prepared and eager for growth, as panelists’ comments and the data support reduced lead times for their companies’ more important purchases. Price instability remains, and future demand is uncertain as companies continue to work down overdue deliveries and backlogs.

“Seventy-six percent of manufacturing gross domestic product (GDP) is contracting, up from 73% in April,” he added. “A larger number of industries contracted strongly, as the proportion of manufacturing GDP registering a composite PMI calculation at or below 45% – a good barometer of overall manufacturing weakness – increasing to 31% in May, compared to 12% in April. May performance was clearly weaker compared to April.”

RESPONDENT COMMENTS
Respondents across multiple manufacturing industries reported mixed performance and pricing. However, respondents citing rising demand comprised the chemical products, machinery, plastics and rubber products, and miscellaneous manufacturing industries.

A respondent in the computer and electronic products industry said “our scientific instrumentation business continues to be weakened by lending to support capital purchasing, while services and consumables stay on track and continue to increase in some markets. Hiring has slowed in response to continued global uncertainty on inflation and unrest in Europe.”

A respondent in the transportation equipment industry reported a strong backlog of customer orders, but new orders are slowing. “Our supplier on-time delivery continues to be a challenge for us, and we still face price increases on a weekly basis,” the respondent said. “Labor shortages are getting better within our organization and throughout our supply chain.”

A respondent in the furniture and related products industry noted lower but stable sales — “soft, not catastrophic.”

In the food, beverage and tobacco products industry, a respondent said “pricing seems to be becoming the primary focus of supply and sourcing teams, as customers and consumers are beginning to push back. While inflation is easing on some discretionary goods, high food costs persist across more categories.”

In the electrical equipment, appliances and components industry, a respondent said reported “a slowdown is clear. This is stunting growth and currently making 2023 demand look flat to only slightly up, compared to original projections of 10% growth.”

A respondent in the fabricated metal products industry sees “signs of slowing in the second half of 2023 and potentially into early 2024. Logistics, particularly from East Asia, continue to return to historical-level transit times; Europe and India remain elevated. Supply shortages are limited to select items only. Suppliers are still seeking price increases but are too late to be asking now.”