Economic activity in the manufacturing sector expanded in May, and the overall economy grew for the 96th consecutive month, say the nation’s supply executives in the latest Institute for Supply Management (ISM) Manufacturing Report On Business.
Manufacturing expanded in May as the PMI registered 54.9 percent, an increase of 0.1 percentage point from the April reading of 54.8 percent, indicating growth in manufacturing for the ninth consecutive month. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management (ISM) Manufacturing Business Survey Committee states, “The past relationship between the PMI and the overall economy indicates that the average PMI for January through May (56.1 percent) corresponds to a 4.0 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for May (54.9 percent) is annualized, it corresponds to a 3.7 percent increase in real GDP annually.”
A PMI above 43.3 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the May PMI indicates growth for the 96th consecutive month in the overall economy and the ninth straight month of growth in the manufacturing sector.
Orders, Production and Inventory
ISM’s New Orders Index registered 59.5 percent in May, which is an increase of 2 percentage points when compared to the 57.5 percent reported for April, indicating growth in new orders for the ninth consecutive month. New orders returned to the higher (near 60) levels since experienced in December 2016. A New Orders Index above 52.3 percent, over time, is generally consistent with an increase in the Census Bureau’s series on manufacturing orders (in constant 2000 dollars).
ISM’s Production Index registered 57.1 percent in May, which is a decrease of 1.5 percentage points when compared to the 58.6 percent reported for April, indicating growth in production for the ninth consecutive month. An index above 51.4 percent, over time, is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.
The Inventories Index registered 51.5 percent in May, which is an increase of 0.5 percentage point when compared to the 51 percent reported for April, indicating raw materials inventories are growing in May. An Inventories Index greater than 42.9 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis (BEA) figures on overall manufacturing inventories (in chained 2000 dollars).
ISM’s Backlog of Orders Index registered 55 percent in May, a decrease of 2 percentage points from the 57 percent reported for April, indicating growth in order backlogs for the fourth consecutive month. Of the 90 percent of respondents who reported their backlog of orders, 23 percent reported greater backlogs, 13 percent reported smaller backlogs, and 64 percent reported no change from April.
Exports, Imports and Prices
ISM’s New Export Orders Index registered 57.5 percent in May, a decrease of 2 percentage points when compared to the 59.5 percent reported for April, indicating growth in new export orders for the 15th consecutive month.
ISM’s Imports Index registered 53.5 percent in May, a decrease of 2 percentage points when compared to the 55.5 percent reported for April, indicating that imports are growing in May for the fourth consecutive month but at a slower rate.
“There is a lot of talk going on, because what is happening in the U.S., about whether or not Imports were going to stay strong and whether or not companies were going to build in America,” says Foire. “We asked over 700 companies if they had changed any of their plans about reshoring or insourcing. The answer came back resoundingly, no. So we don’t believe anything going on politically or economically within the U.S. is changing any U.S. company’s strategy at the present time.”
The ISM Prices Index registered 60.5 percent in May, a decrease of 8 percentage points when compared to the April reading of 68.5 percent, indicating an increase in raw materials prices for the 15th consecutive month. In May, 30 percent of respondents reported paying higher prices, 9 percent reported paying lower prices, and 61 percent of supply executives reported paying the same prices as in April.
Fiore commented, “A review of ‘Commodities Up in Price’ indicates that basic commodity cost increases experienced in 2016 have made their way into higher value components, and with these costs moderating, more normal buying policies focused on supply assurance at affordable prices will be more prevalent.”
A Prices Index above 52.4 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Producer Price Index for Intermediate Materials.
ISM’s Employment Index registered 53.5 percent in May, an increase of 1.5 percentage points when compared to the April reading of 52 percent, indicating growth in employment in May for the eighth consecutive month. Employment levels have been expanding since October 2016, and the search for qualified workers (as mentioned by multiple respondents) has become more difficult. An Employment Index above 50.5 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.
“The report still shows a strong growth trend that will continue,” explaisn Fiore. “I think the moderating of price pressure is a positive thing and I think the production decrease is more of a blip — so don’t expect it to stay.”
The monthly Manufacturing ISM Report on Business is based on the survey results of approximately 350 professionals across 18 different industry sectors. The report is released on the first business day of each month and features the PMI Index as its key measure. For more information on the Institute for Supply Management, visit www.ism.ws.