Manufacturing index inches up, but signals activity still depressed

While the Institute for Supply Management headline number and its read of the overall economy suggested moderate improvement in May, in general it showed the sector remains in contraction, and with key components stuck in the 30% range, analysts said the report was weaker than it seemed.

May's PMI ticked up 1.6 points to 43.1% from 41.5% in April, according to data released Monday.

“Most of the survey’s key indexes were in the 30s, suggesting that activity is more depressed than indicated by the headline index,” said Roiana Reid, U.S. economist at Berenberg Capital Markets. “May likely reflected a transition month as states allowed ‘non-essential’ manufacturing activities to resume. The ISM manufacturing sentiment index will bounce in June, possibly returning to expansion territory (above 50) because of the reopening, but the level of activity will remain depressed.”

Economists polled by IFR Markets expected PMI to be 43.0%.

While the manufacturing sector was contracting, the ISM report suggested “expansion in the overall economy after April’s contraction, which ended a period of 131 consecutive months of growth,” said Timothy R. Fiore, Chair of the Institute for Supply Management manufacturing business survey committee.

The new orders index came in at 31.8%, up from April’s 27.1%.

“U.S. manufacturing showed an improvement in May according to the ISM survey,” said Edward Moya, senior market analyst at OANDA. “Still deep in contraction territory, the headline reading improved from an 11-year low, but fell shy of the consensus estimate. New orders improved significantly along with all the other components.”

Production registered 3.2%, up from April’s 27.5%. The employment index was 32.1%, an increase from 27.5%. The prices index rose to 40.8% from 35.3%, while inventories also increased to 50.4% from 49.7%.

“The ISM report confirms that economic recovery is taking hold,” Moya said. “U.S. stocks flickered positive after the improving outlook for manufacturing.”

Reid noted, the details of the survey remained weak but were less negative than April. "Eight of the 10 subindexes remained in contraction territory but seven increased, and six of 18 manufacturing industries reported growth, up from two in May,” she said.

April construction spending
April construction spending declined 2.9% on a seasonally adjusted annual rate to $1.346 trillion, according to data released by the U.S. Census Bureau on Monday.

Economists polled by IFR Markets expected the number to be 6.0% below the March level.

The April number is 3% higher than April 2019's $1.307 trillion mark. Despite the coronavirus pandemic and the economic shutdown, construction spending grew 7.1% in the first quarter of 2020 to $412.5 billion from $385.2 billion in the same time period in 2019.

Private construction fell 3.0% in the month to $1.004 trillion, from March's $1.036 trillion. Residential construction dropped 4.5% to a seasonally adjusted annual rate of $536.8 billion, from March's $561.9 billion. Nonresidential construction decreased 1.3% in April, to $467.3 billion from a revised $473.6 billion in March.

Public construction spending slid 2.5% to $342.1 billion from $351.0 billion in March. Educational construction was down 2.3% to $78.6 billion from March’s $80.4 billion. Highway construction fell 5.2% to $106.1 billion, from $111.9 billion.

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