US Manufacturing Numbers Fail Expectations for May: What it Means

One reason investors like the Purchasing Managers Index is that it is easy to read. If the number is above 50, things are expanding. If it’s below 50, they’re contracting. In the simplest sense, the way to read the PMI of any country (ISM publishes PMI’s for many important international manufacturing countries) is to determine whether the economy is expanding or contracting merely by seeing if the number is above or below 50.

For example, at 50.6, U.S. Manufacturing is still expanding, though not by much. It’s close to flat. If it had come in at 49.6, we’d know Manufacturing would be contracting.

While some analysts focus on the relative strength of expansion (i.e. last month we were above 52, which could be interpreted as relatively stronger expansion), my next-level analysis of a given PMI report is looking into the “sub-indices”- the specific areas of survey. For example, looking deeper into the cause of the fall of this month’s PMI, we read “The muted rise in output was attributed to softer demand conditions and subdued growth of new orders.” 1

Aside from the alarming top-line print of 50.6, there were some interesting insights underneath the hood of this month’s report. One of the great things about the PMI report is that it’s in survey format, and that leads to some very insightful and helpful narrative statements from the Purchasing Managers being surveyed. Rather than working backward for interpretation from hard numbers like we typically do with, say, non-farm payroll reports, the narrative is the focus.

• Softest New Business since 2009: “The rise in new business in May was the softest recorded since the series began in October 2009.” That’s a troubling statement given the proximity of October 2009 to the doldrums of the last recession.
• Hiring slowdown: “Consequently, firms put the brakes on hiring. The latest increase in employment was only marginal and the smallest for just over two years.” This shouldn’t be too surprising on many levels- given the political risks that Manufacturing faces during our face-off with China, it makes sense to be conservative in personnel. Additionally, employment has been historically robust of late, and some consolidation was bound to happen.
• Inflation Surprisingly Low: “Input price inflation eased for the third month running in May, despite continued comments from panellists regarding the ongoing impact of tariffs.” Inputs are the labor, raw materials, energy, etc. that producers pay to produce. This is surprising because tariffs raise prices by their nature. Economists have anticipated more inflation than has materialized from the administration’s trade policies yet again.

At the end of the day, US PMI’s are telling us that both Services and Manufacturing are still expanding. They are doing so at a slower than anticipated pace of late, but are not contracting. Contrary to what it may intuitively appear, PMI declining from above 52 to 50.6 does not equal contraction, just a slower rate of expansion. Analysts are still struggling to interpret the impact of Trade Wars on the economy, as the places we’d assume tariff impacts would show up (inflation in costs for producers) have not showed any warning signs yet.

Nonetheless, a slowdown in hiring and soft new demand for both goods and services might indicate a slower pace of growth going forward. For true indication of hiring impacts, we need to keep an eye on employment and payrolls this summer.

This information is solely a representation of publicly available facts intended for educational use only. This is not a solicitation to buy or sell any public or private Security, in any city named in the article or elsewhere. PMI and other soft data is not a recommended Market timing tool- we do not expect readers will use this data to buy or sell securities.