The Institute of Supply Management’s Index moved down 0.7 points on month, (m/m) to 52.1 for May 2019. This value is an encouraging sign for the manufacturing sector. The index has been greater than 50, (>50 = expansion) for thirty-three consecutive months. The new orders sub-index scored a 52.7. Overall, the ISM manufacturing index is strong and fundamentals remain favorable as the global economy strengthens and the U.S. dollar depreciates.
The ISM manufacturing index is based on surveys of 400 purchasing managers in 20 industries. The survey is a diffusion index calculated as a percent of responses. A value of 50 is neutral, while less than 50 is contracting and greater than 50 is expansionary.
Figure 1 breaks down the detail of the composite index and sub-indexes. The composite index score for May was 52.1. One year ago, the composite index was a strong at 58.7.
Figure 2 shows the history of the ISM manufacturing index from 2003 to present. On a 3 month moving average, (3MMA) basis, the index posted a value 53.4, down 8.6% 3 months year on year (y/y). When examined on a 12MMA y/y comparison, the index decreased by 3.4% y/y.
Breaking down the sub-indexes for the monthly numbers: Inventory, (not seasonally adjusted) sub-index moved-down 2.0 points m/m to 50.9 in May. ISM notes that suppliers were overselling forecast and don’t foresee an end to the upswing in business, finding it difficult to hire skilled and unskilled labor, and seeing an increase in prices due to industry demand.
Of the 18 manufacturing industries, 11 reported growth in May, in the following order: Printing & Related Support Activities; Furniture & Related Products; Plastics & Rubber Products; Textile Mills; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; Computer & Electronic Products; Chemical Products; Food, Beverage & Tobacco Products; Nonmetallic Mineral Products; and Machinery. The six industries reporting contraction in May — listed in order — are: Apparel, Leather & Allied Products; Primary Metals; Petroleum & Coal Products; Wood Products; Paper Products; and Fabricated Metal Products.
The production sub-index decreased by 1.1 points to 51.3. The employment index moved up by 1.3 points to 53.7. The most significant change was in order backlogs which decreased by 6.7 points to 47.2.
An Institute for Supply Management respondent stated, ““Business is continuing to grow and expand. The pressure for driving out costs has increased significantly, and my company is facing major changes over the next several years to remain cost competitive.”
Manufacturing has maintained in 2019, the ISM manufacturing report continues to be encouraging. This month’s results showed a jump in the cost of raw materials, with prices for steel and other materials increasing because of tariffs imposed by the Trump administration.
At Gerdau we closely monitor the ISM manufacturing index since it is an excellent barometer of the present strength as well as a window on the likely short-run future of US manufacturing.