U.S. manufacturing economy heading in the wrong direction

June 02, 2011

While the numbers look okay, the trend is definitely showing that manufacturing is slowing down, giving rise to fears of the dreaded "double-dip" recession.

While the latest report from the Institute for Supply Management (ISM) shows May's numbers remained on the "growing" side of the benchmark, manufacturing definitely slid towards contraction, with May's figures marking the worst slide since 1984.

Economic activity in the manufacturing sector expanded in May for the 22nd consecutive month, and the overall economy grew for the 24th consecutive month. However, the Purchasing Managers Index (PMI) dropped to 53.5% in May compared to 60.4% in April, a decline of 6.9 percentage points. "This is the first reading below 60% for 2011, as well as the lowest PMI reported for the past 12 months," said ISM's Bradley J. Holcomb, CPSM, CPSD, and new chair of the Institute for Supply Management's Manufacturing Business Survey Committee. Holcomb replaced the retired Norbert J. Ore who served as chair of this committee for 15 years.

"Slower growth in new orders (down 10.7 percentage points to 51.0% in May from 61.7% in April) and production (down 9.8 percentage points to 54.0% in May from 63.8% in April) are the primary contributors to this month's lower PMI reading," Holcomb continued. "Manufacturing employment continues to show good momentum for the year, as the Employment Index registered 58.2%, which is 4.5% lower than the 62.7% reported in April. Manufacturers continue to experience significant pressures from commodities and other inputs."

In fact, while Holcomb puts a positive spin on the report, every number in the ISM's Manufacturing Index is in negative territory, with two of the 11 indices measures contracting by double digits: New Orders (-10.7%) and Backlog of Orders (-10.5%).

Of the 18 manufacturing industries, 14 reported growth in May. However, Chemical Products and Plastics & Rubber Products trailed near the end of that list, which is ordered by growth. "Chemical prices are under increasing cost pressure, driven by feedstock and transportation costs," noted one Purchasing Manager from the Chemical Products sector.

Commodities continue to rise in price with both aluminum and steel up for the ninth consecutive month; HDPE rose for the third consecutive month, while packaging materials, petroleum-based products, plastics, plastic products, and polypropylene resins up for the fifth consecutive month. Commodities listed in "Short Supply" within the ISM's report included nylon and nylon polymer for the third consecutive month.