Executive Summary
The US ISM Manufacturing PMI index has fallen below consensus estimates for the second month straight, leading to a slight increase in recession risk for the last two months. Despite a contracting Manufacturing PMI, the overall economy is still growing but at a slower rate. In conclusion, you should stay invested in the S&P 500.
Why You Should Care About This Leading Economic Indicator!
The Institute for Supply Management (ISM) Manufacturing Survey, formally known as the Manufacturing Purchasing Managers' Index (PMI), is a major economic indicator representing the health of the US economy through the manufacturing sector. The ISM surveys four hundred companies in twenty major industries about new orders, production, employment, supplier deliveries, inventories, customers' inventories, prices of materials, backlog of orders, imports, and exports; from all that data, it creates a Purchasing Managers Index (PMI), the ISM survey’s headline figure. The purchasing and supply managers at these four hundred companies share their thoughts on the current and future state of supply and demand for their products. By the end of this investment report, you will know whether the US economy is contracting or growing and how to make an investment decision based on it.
Key Points
The Manufacturing PMI was down 0.5% points in May ― 48.7%; it went below 50 in April, at 49.2%, representing a two-month contraction. Although at a slow rate, the overall economy is still growing as the Manufacturing PMI has been above 42.5% for over a year and has been up 1.1% points since May '23. Demand slowed down due to the contractions of new orders and backlog of orders. The 2.5% point increase in employment offset the 1.1% point decline in production, leading to a balanced output. Input was stable as supplier deliveries remained unchanged, while imports and prices remained at 57% and 51.1% in expansion territories.
Significant changes occurred in new orders, employment, prices, backlog of orders, and net export orders, impacting the overall Manufacturing PMI. New orders were down 3.7% points ― 45.4% ― a decline that began in April '24. The drivers of such a decline were wood products, textile mills, nonmetallic mineral products, transportation equipment, electrical equipment, appliances & components, fabricated metal products, food, beverage & tobacco products, and machinery. Employment was up 2.5% points ― 51.1% ― the first expansion after six consecutive contractions. Seven of the eighteen manufacturing industries drove employment growth ― printing & related support activities, petroleum & coal products, nonmetallic mineral products, food, beverage & tobacco products, transportation equipment, primary metals, and chemical products. Prices decreased by 3.9% points to 57%; twelve industries reported paying higher prices for raw materials ― primary metals, textile mills, paper products, printing & related support activities, electrical equipment, appliances & components, plastics & rubber products, machinery, chemical products, computer & electronic products, miscellaneous manufacturing, food, beverage & tobacco products, and fabricated metal products ― contributing to the index decline.
In May, the backlog of orders decreased by 3% points to 42.4%, extending to a twenty-month contraction trend. Lower demand in nine out of the eighteen manufacturing industries was the main driver of the price decline; those industries were the following: wood products, electrical equipment, appliances & components, computer & electronic products, machinery, transportation equipment, furniture & related products, food, beverage & tobacco products, miscellaneous manufacturing, and fabricated Metal Products. In May, net export orders reentered the expansion territory, 50.6%, after a -2.6% point decline in April. Such a boost was driven by Wood products, chemical products, food, beverage & tobacco products, and computer & electronic products, as overseas customers continue to enjoy American products.
Overall, the following industries grew in May ― printing & related support activities, petroleum & coal products, paper products, textile mills, primary metals, fabricated metal products, and chemical products. On the other hand, the following industries contracted in May ― wood products, plastics & rubber products, machinery, computer & electronic products, furniture & related products, transportation equipment, and food, beverage & tobacco products.
Historical chart Analysis
Investment Analysis
Overall, the Manufacturing PMI is contracting, albeit a growing economy. New orders are weak and contracting, while employment is expanding and growing. Recession risk have increased in the last two months because the Manufacturing PMI moved below 50%. It went from 50.3% in March to 49.2% and 48.7% in April and May, respectively. We recommend staying invested in the S&P 500.
Comments