Economists Divided on Implications of U.S. ISM Manufacturing Index
A three-year high in exports contributed to a rebound in production and an improvement in new orders in the U.S. ISM manufacturing index for May, yet the manufacturing sector remained in contraction for the fourth consecutive month. Economists said the upward trend is consistent with growth in the broader economy, while others emphasized weakness in the domestic economy.
The headline index improved to 49.6, the highest level seen in 2008.
"At the very least, it no longer looks like the economy is headed for a severe recession," said Paul Ashworth, senior U.S. economist from Capital Economics, noting that the headline index is consistent with GDP growth above 1.5%.
Charmaine Buskas, senior economics strategist at TD Securities, said the improvement was the result of "resilient global demand and the continued correction in the U.S. dollar." She said the improvement is positive, but that it "by no means makes up for the deterioration in consumer fundamentals and the other headwinds that currently plague the U.S. economy."
New orders improved to 49.7 following two months at the 46.5 level, and production rebounded to 51.2, up from 49.1 in April. Both are greatly helped by the improvement of exports to 59.5, a two-point increase from the previous month.
"This strength of overseas demand has helped partially counterbalance the decline in domestic demand as the U.S. economy continues to struggle amid a protracted economic slowdown," she added.
T.J. Marta, fixed income strategist at RBC Capital Markets, called the release "an upside surprise", adding that "the economy is proving less weak than feared" and that inflation remains a problem. Marta said rising prices support the view that the Fed needs to confront inflation more than it needs to promote growth, though he does not think the Fed will hike rates soon.
The data is consistent with the Fed "remaining on the sidelines", said Robert Hogue, senior economist at RBC Capital Economics. However, he said the central bank may have to ease furtehr to limit moderation in growth since the upward impact of the fiscal stimulus rebate cheques will be temporary.
Prices continued at elevated levels by rising to 87.0 in May following an 84.5 reading in April, the highest level since 1994.
"High energy prices are no doubt pressing already tight margins and leave manufacturers in a tight spot as they are somewhat limited in their ability to pass on these higher prices," Buskas said.
One manufacturing respondent in the report said "pricing is skyrocketing for chemicals," while another representing food, beverage & tobacco products said, "Ethanol-driven agricultural commodity increases continue to pose major hurdles."
Norbert J. Ore, chairman of the ISM Survey Committee, said "manufacturers find themselves caught between rising costs and weakening demand in many industries. Exports continue strong due to the weak dollar - without the weak dollar the story would be much more negative in manufacturing."
Employment, which will be closely watched as nonfarm payrolls comes out this Friday, came in at 45.5, up marginally from 45.4 in April and marking the seventh month in a row of cutbacks.
"Overall, soft but not catastrophic," said Ian Shepherdson, chief U.S. Economist at High Frequency Economics. "But remember: this is a deeply atypical, consumer-led downturn," he added.
The non-manufacturing ISM for May will be released on Wednesday.
By Patrick McGee and edited by Stephen Huebl