Today’s manufacturing report by the Institute for Supply Management shows that the manufacturing recovery remained strong in May. The overall index edged down slightly from 60.4 in April to 59.7 in May, and there were no significant movements in most of the survey components such as production or orders. The recent upturn in the housing activity due to the expiration of the homebuyer tax credit in April is having a positive impact on some industries such as wood products, electrical equipment and appliances, all of which reported increasing orders and production in today’s report. However, when the effects of the credit wear off in the coming months, the manufacturing expansion will likely decelerate a bit.
The rise in the employment component of today’s report to 59.9 – the highest level in six years – is a hopeful sign that this Friday’s employment report will include a fifth consecutive increase in manufacturing employment in May. At the same time, the fact that the export component increased to 62 – the highest level in two decades – is encouraging and shows that exports are continuing to lead the expansion. This is good news for manufacturers since manufacturing dominates U.S. exports (59 percent), and more than a quarter of manufacturing employment is supported by exports. Looking ahead, we will be watching exports for any spillover effects of the European debt crisis into the U.S. economy.