June 1, 2018

May 2018 ISM Manufacturing: 58.7 Percent, Up from April’s 57.3 Percent (UPDATE: Markit PMI Is Also Strong)

Filed under: Economy — Tom @ 9:59 am

Predictions: FXStreet.com has a consensus prediction of 58.2 percent, up from April’s 57.3 percent.

The report will be here at 10 a.m.

HERE IT IS: A bit of a beat (bolds and most paragraph breaks are mine) —

Economic activity in the manufacturing sector expanded in May, and the overall economy grew for the 109th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.

The May PMI® registered 58.7 percent, an increase of 1.4 percentage points from the April reading of 57.3 percent.

The New Orders Index registered 63.7 percent, an increase of 2.5 percentage points from the April reading of 61.2 percent. The Production Index registered 61.5 percent, a 4.3 percentage point increase compared to the April reading of 57.2 percent.

The Employment Index registered 56.3 percent, an increase of 2.1 percentage points from the April reading of 54.2 percent. The Supplier Deliveries Index registered 62 percent, a 0.9 percentage point increase from the April reading of 61.1 percent.

The Inventories Index registered 50.2 percent, a decrease of 2.7 percentage points from the April reading of 52.9 percent. The Prices Index registered 79.5 percent in May, a 0.2 percentage point increase from the April reading of 79.3 percent, indicating higher raw materials prices for the 27th consecutive month.

“Comments from the panel reflect continued expanding business strength. Demand remains strong, with the New Orders Index at 60 or above for the 13th straight month, and the Customers’ Inventories Index remaining at very low levels.

The Backlog of Orders Index continued expanding, with its highest reading since April 2004, when it registered 66.5 percent. Consumption, described as production and employment, continues to expand in spite of labor and skill shortages. Inputs, expressed as supplier deliveries, inventories and imports, had expansion declines, due primarily to inventory reductions likely caused by supplier performance issues. Lead-time extensions, steel and aluminum disruptions, supplier labor issues, and transportation difficulties continue. Export orders expanded at slower rates.

The Prices Index is at its highest level since April 2011, when it registered 82.6 percent. Demand remains robust, but the nation’s employment resources and supply chains continue to struggle. Respondents say price pressure at their companies is causing price-increase discussions as we prepare to enter H2.

Of the 18 manufacturing industries, 16 reported growth in May, in the following order: Textile Mills; Nonmetallic Mineral Products; Electrical Equipment, Appliances & Components; Printing & Related Support Activities; Fabricated Metal Products; Furniture & Related Products; Machinery; Chemical Products; Food, Beverage & Tobacco Products; Computer & Electronic Products; Petroleum & Coal Products; Plastics & Rubber Products; Miscellaneous Manufacturing; Transportation Equipment; Paper Products; and Primary Metals. No industry reported a decrease in PMI® in May compared to April.

The increases in New Orders and Production well into the 60s are a bit on the hot side. If sustained, there will be inflation (as seen in the very high Prices Index), or at least inflationary fears, and the Fed will be tempted to raise interest rates faster. My take is that rates need to be raised, but not too quickly.

The Backlog of Orders figure of 63.5 percent is the highest I’ve seen in 13 years of blogging. A very positive backlog figure is good news, because it helps manufacturers plan better. But a figure as high as May’s, if sustained, may lead to concerns about responsiveness, extended lead times, and bottlenecks.

To be clear, these are all relatively nice problems to have, but they bear watching.

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UPDATE, 4:45 p.m.: Markit’s index dipped a tiny bit (HT Zero Hedge), but was strong, as shown in the accompanying narrative —

The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered 56.4 in May, down fractionally from 56.5 in April. The reading marked the second strongest improvement in the health of the sector since September 2014. The upturn was largely driven by sharp increases in production and new business. The greatest lengthening in supplier delivery times since the series began in October 2009 also contributed to the headline figure.

… Reflective of stronger demand conditions, new orders increased sharply in May. Moreover, the rate of growth was the second-fastest since September 2014 (after April 2018). Alongside the acquisition of new clients, panellists also noted that customers were demonstrating a greater propensity to spend. In contrast, new export orders increased only marginally.

As the rate of new business growth continued to outstrip that of output, backlogs rose again in May, increasing at the fastest rate in over two-and-a-half years. As a result, firms added to their payrolls again, with the rate of job creation picking up slightly during the month though failing to match the highs seen earlier in the year.

Meanwhile, price pressures remained elevated.

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