May Supply Managers

The Institute for Supply Management (ISM) saw significant deterioration in the growth rate of its manufacturing index and improvement in the progress of the country’s service sector in May.  Since anything above 50 signals growth, the 53.5 reading of the country’s production side tells us manufacturing is still moving forward, but its pace has slowed from April when the reading was 60.6.  Representing a larger part of our economy, the non-manufacturing ISM accelerated to a 54.6 reading after 52.8 in the prior month.

The forward looking component of the manufacturing ISM, new orders, fell 10.7 points to 51.0.  This will be on our watch list in the coming months because it is so close to the breakeven level of 50.  A persistent weakening in new orders will mean shrinking output for the economy in the near future.  Let’s hope this is a one-off occurrence.  Other notable areas of deceleration include production, employment, and backlogs.  These translate into slowing output, fewer new hires, and less waiting time for orders to be filled.  The one bright spot in the data is the inventory level.  Purchasing managers feel their suppliers do not have enough inventories to fulfill future requests even if new orders decline somewhat.

Contrary to its counterpart, the non-manufacturing ISM number grew suggesting the service side of the economy has seen an increase in its rate of growth.  New orders rose along with employment and backlogs. This is an encouraging statistic since so many other indicators we follow have been receding. If America is to normalize, this side of the economy will need to continue to progress.

It is worth noting that the manufacturing side tends to move more in line with the business cycle since Americans must have their taxes done and hair cut but have a tendency to put off buying things like cars and refrigerators during recessions.  While manufacturing continues to escalate, the rate has relaxed.  It has done this before since the bottom of the great recession and reaccelerated.  Atlas’ hopes are that it follows a similar pattern this time.  Our economy has hardly heated up enough for it to spark a new cyclical downturn.