US: Manufacturing Slips Further into Contraction in May

The ISM Manufacturing Index slipped further into contractionary territory in May, dipping to 48.7 from 49.2 in April, disappointing expectations for a marginal gain. The contraction also became more broad based, with 55% of manufacturing GDP having contracted in May, up from 34% in April.

Demand slowing was reflected by the new orders index dropping deeper into contraction, and additional comments from respondents mentioning “softening”. The backlog of orders index also dropped further into contractionary territory.

Output also moderated, and only barely remained in positive territory (50.2). However, employment flipped into expansionary territory in May, rising to 51.1, from 48.6 in April.

One silver lining was that price pressures seem to have eased since April. The prices paid sub-index fell 3.9 percentage points to 57 5.1 pp to 60.9, remaining in “increasing” territory.

Key Implications

The manufacturing sector has remained in contractionary territory for 18 of the last 19 months. The post-pandemic normalization of demand for goods and restrictive monetary policy have both weighed on the sector. The ISM Institute commented that “companies demonstrate an unwillingness to invest due to current monetary policy and other conditions”.

May’s manufacturing sentiment adds to the growing pile of evidence that high interest rates are acting to slow the economy. Last week’s personal income and spending data  showed a more cautious consumer to start the second quarter. This slowing should help cool inflationary pressures in the U.S. economy and enable the Fed to take rates lower later this year.