Manufacturing still contracting, but there are signs of improvement

June 02, 2009

The U.S. manufacturing industry continued to contract in May as the Purchasing Management Index (PMI) registered 42.8%. This is the 16th consecutive month of contraction in the manufacturing sector. A reading above 50% indicates manufacturing is generally expanding; a reading below 50% indicates that manufacturing is generally contracting. May’s number was 2.7% points higher than the 40.1% reported in April.

A PMI in excess of 41.2% over a period of time generally indicates an expansion of the overall economy, so that May’s PMI might indicate signs of growth in the overall economy following seven months of decline, and despite continuing contraction in the manufacturing sector.

“While unemployment and inventories continue to decline at a rapid rate and the sector continued to contract during the month, there are other signs of improvement,” said Norbert Ore, chair of the Institute for Supply Management’s Manufacturing Business Survey Committee. “May is the first month of growth in the New Orders Index since November 2007, with nine of 18 industries reporting growth.” New orders are a leading indicator, and the index has risen rapidly after bottoming at 23.1% in December 2008. “Also, the Customers’ Inventory Index remained below 50% for the second consecutive month, offering encouragement that supply chains are starting to free themselves of excess inventories as nine industries report their customer inventories as ‘too low.’ The prices that manufacturers pay for raw materials and services continued to decline, but at a slower rate than in April.”

ISM’s New Orders Index registered 51.1% in May, 3.9% higher than the 47.2% registered in April. This is the first month the New Orders Index has moved above 50%, following 17 consecutive months of contraction. Nine industries reported growth in new orders in May, including the “Plastics & Rubber products” category.

“The past relationship between the PMI and the overall economy indicates that the average PMI for January through May (38.1%) corresponds to a 1% decrease in real GDP. In addition, if the May PMI (42.8%) is annualized, it corresponds to a 0.5% increase in real GDP annually,” noted Ore. [email protected]

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