May 2023 ISM and S&P Global Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey of U.S. manufacturers reflected faster contraction in the sector during May. The PMI registered 46.9%, down 0.2 percentage point (PP) from April’s reading. (50% is the breakpoint between contraction and expansion.) ISM’s manufacturing survey represents under 10% of U.S. employment and about 20% of the overall economy. Subindexes with the largest changes included prices paid (-9.0PP), and order backlog (-5.6PP). 

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Concurrent activity in the services sector -- which accounts for 80% of the economy and 90% of employment -- narrowly avoided falling into contraction (-1.6PP, to 50.3%). Inventory sentiment (+12.1PP; i.e., more companies consider their inventories to be too high), inventories (+11.1PP) and order backlog (-8.9PP) exhibited the largest changes.

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Of the industries we track, only Construction expanded. Respondent comments included the following --

Construction. “Overall slowing growth and market conditions dragging on some construction sectors.”

 

Changes in S&P Global‘s survey headline results were mixed relative to ISM’s. Both manufacturing headline indexes contracted faster; S&P’s services report pushed higher into expansion whereas ISM’s nearly crossed the line into contraction. Details from S&P Global’s surveys follow --

Manufacturing. Renewed decline in manufacturing sector conditions as weak demand drags on performance.

Key findings:
* New orders fall at solid pace...
* ...but output supported by further decline in backlogs of work
* Input costs drop for the first time in three years

 

Services. Strongest upturn in business activity for over a year as demand conditions improve.

Key findings:
* Sharpest rise in new business since April 2022
* Cost pressures soften but remain marked
* Solid upturn in employment

 

Commentary by Chris Williamson, S&P Global’s chief business economist --

Manufacturing. “May saw a renewed deterioration of business conditions in the US manufacturing economy which will add to concerns about broader economic health and recession risks.

“Although a record improvement in supplier delivery performance helped manufacturers fulfil back orders in May, generating a third successive monthly rise in output, the overall rate of production growth remained disappointingly meagre thanks to a further drop in new order inflows.

“Unless demand picks up, production growth will move into decline seen as it is clearly unsustainable to rely solely on backlogs of orders, which are now being depleted at the fastest rate for three years. Hence companies are cutting back sharply on their input buying and seeking to minimize inventory, tightening their belts for tough times ahead.

“All of this is of course disinflationary, with manufacturers and their supply chains having seen pricing power shift rapidly from the seller to the buyer over the course of the past year, resulting in a dramatic cooling of industrial price pressures.

“We are likely to see further downward pressure on both output and prices for goods in the coming months, thanks to the demand environment which has been hit by higher interest rates, the increased cost of living, economic uncertainty and a post-pandemic shift in spend from goods to services.

“The one area of resilience is the labor market, as firms continued to take on more staff to fill long-empty vacancies, though we should bear in mind that employment is typically a lagging indicator. It does nevertheless point to some upward pressure on wages.”

 

Services. “The US continued to see a two-speed economy in May, with the sluggishness of the manufacturing sector contrasting with a resurgent service sector. Businesses in sectors such as travel, tourism, recreation and leisure are enjoying a mini post-pandemic boom as spending is switched from goods to services.

“The survey data are indicative of GDP growing at an annualized rate of just over 2%, and an upturn in business expectations points to growth remaining robust as we head further into the summer.

“However, just as demand has moved from goods to services, so have inflationary pressures. While goods price inflation has fallen dramatically in May to register only a marginal increase, prices charged for services continue to rise sharply. Although down considerably on last year's peaks, service sector inflation remains higher than any time in the survey's 10-year history prior to the pandemic, bolstered by a combination of surging demand and a lack of operating capacity, the latter in part driven by labor shortages.

“However, while rejuvenated service providers will make hay in the summer season, the weakness of manufacturing raises concerns about the economy's resilience later in the year, when the headwind of higher interest rates and the increased cost of living is likely to exert a greater toll on spending.”

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.