The Institute for Supply Management’s (ISM) purchasing managers’ index (PMI) fell into contraction territory for the first time in six months. The PMI declined from 50.7 in April to 49.0 in May, with values under 50 indicating contracting levels overall in manufacturing. The decrease indicates that the manufacturing sector, which had seen some signs of progress earlier in the year, has floundered. May is the third straight month we have seen a PMI decline, falling from 54.2 in February.
The measures for new orders and production both fell below 50. The index for new orders dropped from 52.3 to 48.8, and the production index declined from 53.5 to 48.6. In general, these numbers tend to mirror many of the regional sentiment surveys, which have noted sales and output pulling back in the past month or two. Not surprisingly, given the weak activity data, hiring has stalled. The employment index decreased slightly from 50.2 to 50.1, or just barely above neutral.
The sample comments tend to support the more-pessimistic data. A fabricated metal products producer said, “General economy seems sluggish and pensive. Buyers are not buying much beyond lead times.”
Other respondents noted the “flattening” or “softening” of sales, with weaker domestic and foreign sales to blame. On the international front, a machinery maker added, “Downturn in European and Chinese markets is having a negative effect on our business.”
Meanwhile, U.S. orders were impacted by reductions in government spending, according to a computer and electronic products manufacturer, and a transportation equipment leader noted the difficulty in hiring skilled employees.
There were two other data points of note. First, the pricing measure indicates very modest deflation, with the index dropping from 50.0 (neutral) to 49.5 (just barely negative). This is consistent with recent consumer and producer pricing reports that have shown pricing pressures fall over the course of the past year, largely due to lower energy costs.
Second, inventory levels continue to contract, but the rate of decline slowing in May. Stockpiles have fallen in five of the past seven months, which should be a positive if and when new orders pick up.
The bad news is that the manufacturing sector is once again contracting. Sales have been challenged by cutbacks in government spending, higher taxes, and weaker economic growth overseas. As we saw in the latest industrial production report, manufacturing output has grown just 1.3 percent over the past 12 months. Growth is well below what we need to see for positive job creation. Ideally, we would like to see manufacturing production grow by 4.5 percent or more annually on average. To achieve higher growth and get manufacturing back on track Washington must act on pro-growth policies that will help make us more competitive, grow and create jobs.
Chad Moutray is chief economist, National Association of Manufacturers.