Manufacturing output contracted in May, for the second consecutive month, according to the new edition of the Manufacturing Report on Business, which was issued today by the Institute for Supply Management (ISM).
The report’s benchmark reading, the PMI, came in at 48.7 (a reading of 50 or higher indicates growth), down 0.5% from April’s 49.2, which was off 1.1% compared to March’s 50.3 reading. March saw growth after a 16-month stretch of contraction—that was preceded by a stretch of 28 consecutive months of growth. ISM added that with May down, the PMI has contracted, at a faster rate, for two straight months.
The May PMI is 0.8% above the 12-month average of 47.9, with March’s 50.3 marking the high over that period, and June 2023 marking the lowest, at 46.4.
ISM reported that seven manufacturing sectors saw growth in April, including: Printing & Related Support Activities; Petroleum & Coal Products; Paper Products; Textile Mills; Primary Metals; Fabricated Metal Products; and Chemical Products. The industries seeing contraction included: Wood Products; Plastics & Rubber Products; Machinery; Computer & Electronic Products; Furniture & Related Products; Transportation Equipment; and Food, Beverage & Tobacco Products.
The report’s key metrics were mostly down in May, including:
Comments submitted by the ISM member panelists again highlighted various themes related to the economy and market conditions.
A Transportation Equipment panelist observed that business conditions are pacing with budget and forecast for 2024, adding that certain markets are soft, but others are ahead of forecast, allowing his company to maintain overall, while also noting that concerns with the economy continue to drive business decisions.
And a Primary Metals panelist pointed to general concern about overall industry economics.
“Pricing weakness continues, and we anticipate more headwinds in the coming months for spot orders and inflation,” said the panelist. “[The] contract order book remains steady.”
Tim Fiore, Chair of the ISM's Manufacturing Business Survey Committee, said in an interview that while the May PMI declined again, there are some reasons for optimism in the report’s data.
“We expanded employment and marginally expanded production,” he said. “On the inputs side, deliveries and inventories are still accommodative or stubborn. The inventory number, obviously, is a reflection of the fact that people don't want to invest in inventory because they don't want to get stuck with inventory, because they are unsure of the future. And the Supplier Deliveries number also continues to be accommodative in spite of the fact that we thought we started to see a climb out in January but never really drove suppliers to deliver slower.”
In describing the current manufacturing environment, Fiore explained that while it remains good, it is on the precipice of not being so good.
One key reason for that, he cited, is concern in regards to the Production number falling to the 47-to-48 range, due to a lack of work. What’s more, he pointed to the current 20-month stretch of backlog contraction, facing the possibility of running out of backlog at some point, which he said will be coming eventually.
The last time there was a backlog stretch akin to this, he noted, was likely prior to the Great Recession around 2007-2008.
“The New Orders number is the key because that feeds the order book, and with the order book contracting, it is not giving people a lot of comfort,” he said. “Their book-to-bill ratio has to be negative, and as a result, general managers are not opting to make discretionary investments, which would be additional capex, even if it is replacement capex, with manufacturers just running that other stuff longer, rather than just making that commitment.
On the inventory side, it is about staying lean and forcing suppliers to carry the inventory so as not to have manufacturers be stuck with it, with suppliers instead building up and holding the inventory.
“The negative of a soft landing [for the economy] versus a hard landing, which would have seen the economy hit the bottom, with everyone aware of that,” he said. “From there, you have a grow out, which is not what we have here. These are the complexities of the soft landing along with the additional complexities of trying to manage things with a high-precision approach.”