The ISM Manufacturing Index improved moderately in May, rising to 43.1 from 41.5 in the prior month. Economists had projected further contraction in activity but were expecting a somewhat better outcome. Although the May reading indicates that the magnitude of the sharp decline in manufacturing activity is easing, overall factory activity is still contracting.
A number of key components of the index remained very negative for the month. New orders, production, and employment contracted sharply again in May, consistent with the onset of a sharp, severe drop in output. At the margins, all three showed signs of being “less negative” — still contracting, but not at the same pace as a month prior.
Although the negative impact of the sharp contraction in spending is spread across a range of industries, a handful are growing. Not surprisingly, food, beverages, and tobacco are holding up comparatively well, while producers of less essential goods have seen a much more significant negative impact.
Over the course of the last few weeks, new confirmed cases of COVID-19 have been on the decline, prompting many states to begin lifting the restrictions put in place to help reduce the spread of the virus. With many areas of the economy starting to open back up, manufacturers are starting to see some signs of life. Whether that improvement will be sustained rests on a few key factors: the speed at which spending accelerates and the risk posed by another wave of viral outbreaks. The fact that household income and consumer confidence has held up relatively well given the severity of the downturn bodes well for a more pronounced upturn in consumer spending. The enhanced unemployment benefits not only replaced income for many lower income households but resulted in an outright increase in income for many that would otherwise have been among the most vulnerable.
The gradual transition to a service and information economy means that manufacturing is a much smaller piece of U.S. activity than it was in decades past. Still, it remains an important cyclical indicator of the health of the economy. The near-term path remains uncertain, but signs that the economy is picking itself up off the mat is a positive.
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