Manufacturing PMIs Point to a Slight Recovery from Severe Contraction

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Economic Report Monitor #34
June 1st, 2020

The start of a new month means two fresh new manufacturing PMI releases for May from IHS Markit and the Institute of Supply Management (ISM). The IHS report saw continued severe sluggishness in the sector despite a slight recovery to 39.8 from 36.1. Domestic and foreign orders were muted which forced employment lower on unused capacity. The foreign sales index decline was the second-fastest on record. The weakness in demand also led to a drop in prices marking the steepest decline in output charges in series history. While current conditions were already negative, expectations started to decline as optimism for restarting the economy begins to revert to pessimism. The continued enforcement of social distancing measures will likely endanger the speedy recovery for which firms first hoped. However. the worst appears to be over.

The ISM report showed similar dynamics in its cohort of the manufacturing industry. The composite index increased just 1.6 pts to 43.1 in May with the biggest rebounds in new orders, production, and employment, all jumping around 5 pts to the low 30's. Inventories reverted from contracting to slowly increasing. Unlike IHS, the ISM found a slight increase in prices, up 5.5 pts to 40.8. Imports continued to fall as utilization drops. Personal protective equipment continues to be in short supply and up in price. Several raw materials including corn, steel, copper, and aluminum see drops in price with all of those categories seeing price drops for the 2nd - 4th month in a row.

Construction spending stalled in April as COVID-19 impacts forced a drop of -2.9%. Residential construction saw the largest drop at -4.5%. Though a slowdown is evident, it hasn't impacted the trend too badly as year-over-year construction spending is still up 3.0%. Residential spending is still up 6.3% year-over-year, and that's unlikely to be impacted with some initial real estate reports suggesting activity has barely been impacted. In the non-residential sector, commercial and highway/street slowdowns have been the most sluggish, down -2.2% and -5.2%. In all projects, COVID-19 has not discriminated between private and public spending. However, with many states looking at infrastructure projects to bolster the economic recovery, that could be set to change.
 

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