The marquee gauge of US manufacturing activity spent a seventh month in contraction territory, data released on Thursday showed.
That was the bad news. The good news centered around an anomalous undershoot for the underlying measure of input price trends.
At 46.9, ISM manufacturing was essentially in line with estimates. The range of guesses from more than five-dozen blissfully hapless astrologers was 45.5 to 48.5. Not too bad, actually, for a group of people who inexplicably condemned themselves to a career spent forecasting soft science outcomes.
The final read on S&P Global’s gauge of factory activity in the US, also released on Thursday, was 48.4, basically unchanged from the flash estimate.
New orders were weak in both surveys, indicative of lackluster demand, which in turn suggests the goods-to-services transition is ongoing.
The ISM new orders gauge printed just 42.6. “Panelists remain concerned about when manufacturing growth will resume,” ISM chair Timothy Fiore remarked. “Unless demand picks up, production growth will move into decline,” S&P Global’s Chris Williamson said. “It is clearly unsustainable to rely solely on order backlogs, which are now being depleted at the fastest rate for three years.”
But slower demand is conducive to disinflation, as are falling commodity prices. That’s the silver lining. The ISM prices paid gauge dropped nine points from April to May. The 44.2 print counted as the largest downside surprise in nearly four years.
Recall that the measure had moved higher recently, stoking concerns that the disinflationary tailwind on the goods side was poised to fade, to the chagrin of a Fed struggling with entrenched inflation on the services side of the economy. Thursday’s ISM prices print will be welcome in that context, as will the first drop in input costs on S&P Global’s gauge since May of 2020.
In another encouraging sign, the ISM employment gauge managed to rise further into expansion territory, even as ADP’s jobs data for May showed factory employers shed 48,000 jobs last month.
The ISM anecdotes were mixed. You might even argue they tilted towards optimistic. Still, the readily apparent new orders malaise is indicative of subdued demand. Considered with the big downside miss on the prices index, you can certainly make the case for a Fed pause based on the manufacturing side of the economy. The issue, as ever, is that the US runs on services, not factories. And as far as anyone can tell, the services sector is still running very hot.
S&P Global’s Williamson summed up the situation in manufacturing. “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,” he said Thursday.
