Manufacturing activity expanded for the 23rd consecutive month in May
The ISM Manufacturing Index expanded in May, rising to 56.1, a result that was better than the consensus forecast. The reading above 50 is indicative of expanding manufacturing activity for the 23rd consecutive month.
New orders accelerated during May, indicating solid demand amid rising prices increasingly weighing on both the collective mood of consumers and household budgets. Production picked up modestly, but new order flow has extended order backlogs.
Robust consumer demand for goods since mid-2020 had benefited manufacturers, but the reduced health threat of COVID-19 and increased mobility have increasingly tilted consumer spending toward the service sector. Even so, the environment for manufacturers remains relatively upbeat while slowing from the brisk expansionary pace last year.
Early survey data from S&P released a few days ago provided an indication on the state of manufacturing in the United States, providing some foreshadowing of solid new order growth in the ISM survey while also acknowledging the primary challenges for the sector.
At the margins, there may be some signs that supply chain issues may be easing, but the main challenges to manufacturers remain largely unchanged. Supplier deliveries are still slow, and workers are still hard to find. Some easing in demand and modest improvement in supply chain challenges have helped to alleviate pressure, but inventories are still skinny across most product categories.
Similarly, upward pressure on prices appears to be easing but only modestly. Rising raw material costs are still a significant issue, consistent with global supply challenges that are dragging on longer than anticipated. Rising input costs will ripple through to finished good prices and broad measures of consumer prices as well.
The risk to this outlook comes from tightening financial conditions, instigated in part by the Federal Reserve’s tightening policy, and how significantly that tightening will affect demand in the coming months. Those concerns are playing out in stock prices, as whispers about recession risks have echoed louder in the past month. Whether the Fed can successfully navigate the narrow path between doing too little and doing too much remains to be seen.
The bottom line? Slower economic growth doesn’t appear to be an immediate threat to expanding manufacturing activity, as consumer demand continues to be solid. Inventories remain low, and a continued restocking cycle should provide some support even if consumer demand slips. Higher prices and tight labor markets remain greater challenges to stronger output, and those won’t be resolved in the near term.
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