Manufacturing Activity Contracted in May

Economic activity in the manufacturing sector contracted in May for the seventh consecutive month after a 28-month period of growth, the Institute for Supply Management reported in its monthly Report on Business.

“The U.S. manufacturing sector shrank again, with the Manufacturing PMI® losing a bit of ground compared to the previous month, indicating a faster rate of contraction. The May composite index reading reflects companies continuing to manage outputs to better match demand for the first half of 2023 and prepare for growth in the late summer/early fall period.

However, there is clearly more business uncertainty in May. Demand eased again, with the (1) New Orders Index contracting at a faster rate, (2) New Export Orders Index slightly improving to 50%, (3) Customers’ Inventories Index persisting at the low end of ‘too high’ territory, a negative for future production and (4) Backlog of Orders Index dropping to a level not seen since the Great Recession. Output/Consumption(measured by the Production and Employment indexes) was positive, with a combined 3.4-percentage point upward impact on the Manufacturing PMI® calculation.

The Employment Index expanded for the second month (and at a faster rate) after two months of contraction, and the Production Index moved back into expansion territory. Regarding employment, panelists’ comments continue to indicate near equal levels of activity toward expanding and contracting head counts at their companies, amid mixed sentiment about when significant growth will return.

Inputs — defined as supplier deliveries, inventories, prices and imports — continue to accommodate future demand growth. The Supplier Deliveries Index indicated faster deliveries, and the Inventories Index dropped further into contraction as panelists’ companies manage inventories exposure. The Prices Index fell back into ‘decreasing’ territory (and in dramatic fashion) after one month of increasing prices. Manufacturing lead times clearly improved in the month.