Contrary to our expectations, the ISM manufacturing index declined below the threshold of expansion to 49.0 in May down from 50.7 in April. It reached its lowel level since June 2009 and added concerns about the sustainability of the recovery.
Regarding the main components, all decreased excerpt the “inventories” which is not seasonally adjusted and used to grow in May:
The official statement noted:
“The PMI™ registered 49 percent, a decrease of 1.7 percentage points from April’s reading of 50.7 percent, indicating contraction in manufacturing for the first time since November 2012 and only the second time since July 2009. This month’s PMI™ reading is at its lowest level since June 2009, when it registered 45.8 percent. The New Orders Index decreased in May by 3.5 percentage points to 48.8 percent, and the Production Index decreased by 4.9 percentage points to 48.6 percent. The Employment Index registered 50.1 percent, a slight decrease of 0.1 percentage point compared to April’s reading of 50.2 percent. The Prices Index registered 49.5 percent, decreasing 0.5 percentage point from April, indicating that overall raw materials prices decreased from last month. Several comments from the panel indicate a flattening or softening in demand due to a sluggish economy, both domestically and globally.”
Therefore, this index suggests manufacturing activity contracted in May for the first time since November 2012 and that was due to sluggish domestic and foreign demand. On the positive side, note that the “Price Paid” component also suggests that raw materials prices decreased in May and as a consequence inflationary pressures will remain contained. It should offer more room for Fed to stay accommodative in the short term. Finally, “Employment” component was above 50.0 signaling that hiring in the manufacturing still progressed.