ISM reports decent month for May manufacturing

Manufacturing activity saw mostly mild gains in May, according to the most recent edition of the Manufacturing Report on Business issued by the Institute for Supply Management (ISM) today.

The PMI, the ISM’s index to measure growth was up 1.3 percent compared to April at 52.8 (a PMI of 50 or greater represents growth), showing growth for the second straight month after five months of sequential declines, which had been in effect since October 2014. The current PMI is 2.1 percent below its 12-month average of 54.9.

Economic activity in the manufacturing sector has been in expansion mode for 29 straight months, with the overall economy growing for 72 months. Including the PMI, three of the report’s four key metrics were up in May, according to the report.

New orders, often referred to as the engine driving manufacturing, were up 2.3 percent to 55.8, showing growth for the 30th month in a row. Employment saw a 3.4 percent gain to 51.7, following a 1.7 percent decline in April, which is the only month it has not seen growth over the last 24.

From an industry perspective, 14 of the 18 manufacturing sectors reporting into the ISM said they experienced growth in May, with that supported by some encouraging comments submitted in the report from ISM member respondents.

A food, beverage and tobacco respondent said that the economy is showing signs of improvement, while a fabricated metals respondent observed that the automotive sector remains strong, although steel prices have fallen due to overcapacity and the strong U.S. dollar. And a machinery respondent said that the West coast port issues have eased up with incoming imports flowing again.

Brad Holcomb, chair of the ISM Manufacturing Survey Business Committee, said that manufacturing growth could be in a good spot going forward, due to the face that the winter is over and the West Coast port labor crisis is improving.

“Things in this report appear to be well balanced, and it feels like it is well supported, especially when it comes to new orders and employment,” he noted. “New orders up 2.3 percent at 55.8 is pretty meaningful, and employment up 3.4 percent is strong and even more so when you factor in that 14 of the 18 sectors cited in the report indicated employment was up in May, with three flat and only one declining.”

What’s more the ISM’s recent semiannual report also indicated that the final three quarters of 2015 are expected to be strong, following what Holcomb described as a “miserable” first quarter, adding that things are moving in the right direction abroad as well, with recent PMI gains in both China and the Eurozone.

Prices in May saw a 9.0 percent bump to 49.5, with that increase representing pent-up demand and buyers that had waited for a bottom to hit sensing that had happened and are now buying raw materials before prices begin to tick back up.

Backlog of orders were up 4.0 percent to 49.5, which Holcomb said was a byproduct of other gains in the index, including new orders, many of which are export orders and will be able to be transshipped now that the West Coast port labor situation is getting better.

“Backlog of orders is always a consequence of employment levels, which were up 3.4 percent in May and bodes well for the government numbers coming out later this week from the federal government. Isolated to manufacturing, it is a leading indicator of what manufacturing is looking at in future months, because manufacturers are looking at their order books over a horizon of several weeks to months and they are not going to add to their ranks unless they see some positive developments. That is why I like employment’s numbers in this report as most of the other metrics, too.”

As the halfway point of 2015 approaches, Holcomb said that even with things largely in a good place for manufacturing, the global economy needs to continue to be carefully watched, as some past obstacles like poor weather and the port labor issue, are no longer front and center. The strong price of the U.S. dollar continues to server as a drag, but, overall, he said there is enough positive momentum to keep manufacturing growth heading in the right direction.